banks create money

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pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

However, the 1844 Bank Charter Act addressed only the creation of paper bank notes – it did not refer to other substitutes for money, such as bank deposits, which were simply accounting entries on the liabilities side of the banks’ balance sheets. Banks had retained, albeit imperfectly, their ability to create substitutes that could function as money. In order to make the most of their money creation powers, banks were forced to innovate in order to find ways around the new legislation. The use of cheques became common as they made it easier for businesses and individuals to make payments to each other using bank-created money (bank liabilities, or ‘deposits’) in place of cash. At the same time, the development of wholesale money markets (where banks could borrow from each other) and the willingness of the Bank of England to provide funds on demand to banks in good health, further reduced the amount of Bank of England money that banks needed to hold, relative to their customer deposits: “[C]entral banks have facilitated settlement in central bank money by allowing low-cost transfers across their books, either of gross amounts (above all for wholesale payments, facilitating this by providing banks with cheap intraday liquidity) or of multilateral net amounts (more usually for retail payments, minimising the amount of liquidity that participating banks need to hold).”

Since it is the banks that manage their own accounts, they can increase their liabilities as they wish (with some caveats which we will discuss shortly), and in doing so create and destroy the type of money that is used by the public. We will now look at how this process actually works. In all the examples below, we ignore all balance sheet items apart from the ones in question. We also assume that balance sheet items are zero before the transaction in question takes place. This is purely to keep the examples simple and uncluttered. Creating money by making loans to customers How do banks create money by making loans? In this example, a self-employed builder, Jack, walks into MegaBank and asks to borrow £10,000 to buy a new van and some power tools. (Chapter 3 will show that loans to productive businesses like this make up just a small proportion of all bank lending.) Jack signs a contract with the back confirming that he will repay £10,000 over a period of five years, plus interest. This legally enforceable contract represents an asset for the bank and when the bank comes to draw up its balance sheet it will be included as an additional asset worth £10,000.

If you lend £50 to an unreliable friend who still owes you money from the last time you lent to him, then there is a lot of credit risk associated to that loan. So if the numbers that banks add to your bank account are not money, but just credit, then there must be some credit risk attached to that money. In other words, there must be a risk that the bank won’t be able to repay you. The Bank of England makes this argument in a distinction between cash and bank-created money – the 2010 Q3 Quarterly Bulletin states: “Bank of England notes are a form of ‘central bank money’, which the public holds without incurring credit risk. This is because the central bank is backed by the government” (p.302). They imply that cash has no credit risk because it is backed by the central bank, which is in turn backed by the government. While this is true, they fail to mention that the government has a scheme called the Financial Services Compensation Scheme (FSCS), which promises to repay the customers of failed banks up to £85,000 of their account.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

The true explanation is that a dozen or so central banks have printed nearly $7 trillion worth of fiat money between 1971 and 2007 (and $3 trillion more subsequently) in order to manipulate the value of their currencies so as to achieve strong export-led growth. Exhibit 2.4 lists the countries responsible. EXHIBIT 2.4 Foreign Exchange Reserves Source: IMF How It Works Exactly how do central banks create money and accumulate foreign exchange reserves? China has the largest amount of foreign exchange reserves. Therefore, it will be used as the case study to illustrate how central banks accumulate reserves. In 2007, China’s trade surplus with the United States was $259 billion. In other words, China sold the United States $259 billion more in goods and services than the United States sold to China that year.

Despite the massive government borrowing that was required to fund that deficit, the interest rate the government pays on its benchmark bond is 2 percent, which is extraordinarily low. The government demand to borrow money is very high, but the government supply of new fiat money (i.e., the money created by the Fed) is also extraordinarily high. Fiat money creation is financing the government’s budget deficit. When a central bank creates money and uses it to finance the government’s budget deficit, it is said that the central bank is monetizing the debt. With QE1 and QE2, the Fed monetized part the U.S. government debt. That is the main reason U.S. government bond yields—and all other interest rates in the country which are benchmarked off the government bond yield—are so low. That means, in this age of paper money, that if the U.S. government reduces its deficit and borrows less, interest rates will not fall as they would have in the past.

Those unable to devote all their time and energy to deciphering the kaleidoscopic changes in the politics and policies of Washington have the option of constructing a broadly diversified investment portfolio that would ensure significant wealth preservation regardless of whether the price level moves up or down. The following are five components of a diversified portfolio: 1. Commodities generally perform well in an inflationary environment and suffer in times of disinflation or deflation. Gold and silver benefit most from quantitative easing, which undermines public confidence in the national currency. 2. Stocks tend to rise (1) in a healthy economic environment, (2) when central banks create money and pump it into the financial markets (so long as they don’t cause too much inflation), (3) when the government runs a budget surplus and crowds in the private sector, and (4) when the trade deficit is larger than the budget deficit. The last two will be explained below. Stocks tend to perform badly when inflation at the CPI level exceeds 4 percent, in a weak economic environment, and, particularly, during a severe period of debt deflation. 3.


pages: 233 words: 71,775

The Joy of Tax by Richard Murphy

banking crisis, banks create money, carried interest, correlation does not imply causation, en.wikipedia.org, failed state, full employment, Gini coefficient, high net worth, land value tax, means of production, offshore financial centre, quantitative easing, race to the bottom, savings glut, seigniorage, The Spirit Level, The Wealth of Nations by Adam Smith, transfer pricing

And the deficit that gave rise to the Treasury bond or gilt has now been replaced by newly created money, which just goes to prove that this is exactly what a government does when it runs a deficit – it creates government-made money. If you don’t believe this you wouldn’t be alone. Indeed, the person who in my opinion was the second greatest economist of the last century, J. K. Galbraith, said: The process by which banks create money is so simple that the mind is repelled.8 He was right: the process is so simple that we’re repelled by it. But now you know it’s true, and the Bank of England said so in 2014. It’s also true that the UK’s quantitative easing funding has effectively cancelled government debt, as evidenced by the fact that the Bank of England now hands the interest paid to it by the Treasury as a result of it owning government debt straight back to the Treasury from whence it came.

First of all, the best, and in reality the main reason to use taxation is that tax lets a government reclaim the money it has spent into the economy, in order to stop the money supply over-expanding. I have shown that both the government and the banks can create money out of thin air, and do so. In the case of commercial banks control is maintained by requiring that loans are repaid. That process of loan repayment, as noted above, quite literally destroys bank-created money. That’s important: loan repayment stops the amount of money in the economy increasing without check, which would result in inflation. It is just as necessary that the government has available to it a means of destroying the money it can create and spend at will into the economy, and that mechanism is taxation. Taxation literally counterbalances government spending by reclaiming all or part of it from the economy.

The reality of how money is created today differs from the description found in some economics textbooks: 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. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money – they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

In doing so, they inject capital into another business, in this case a real estate agency, or a household if it was a private sale. Hence, via the issuance of debt, commercial banks create money, credit, and purchasing power. The vast majority of what we consider money is created in this manner. Of the two types of broad money, bank deposits make up between 97%–98% of the amount currently in circulation. Only 2%–3% is in the form of notes and liabilities of the government (McLeay et al., 2014). How much debt commercial banks issue and how that debt is utilized are therefore topics of great importance. Rather than exchanging currency, most consumers use their bank deposits as a store of value and as the medium of exchange. Once a bank creates money by issuing debt, most people use that money to make and receive payments via their deposits rather than currency, especially as transactions today are mostly digital.

However, at the same time, it is also creating a new entry in the liabilities section of its ledger. Although this liability previously did not exist, and hence does not have any physical representation in the form of currency, it is in effect an entry in the bank’s account. But as all these entries can be converted into currency, the instant it issues debt the commercial bank is creating new money. Hence, loans create deposits and not the other way around. Th manner in which commercial banks create money by making loans or issuinig credit may be hard to digest if this is the first time you are reading about it, but it is how money is created today. When a commercial bank issues a loan to a client, for example to buy a house, it does not give this loan in cash. Instead, it credits their account with a deposit that amounts to the mortgage. As they make the loan to the borrower, they also credit their assets on their balance sheet.

As such, they are responsible for ensuring how much debt is issued by commercial banks, without which they would not be able to control the supply of money. This lever of control exists in the form of capital requirements. 7 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt Capital requirements play an important role in the production of debt-based money as they offer, among other things, a safeguard to a bank run. Since a bank creates money as it makes out loans, they are at risk of running out of physical currency in the case that a large number of the depositors decide to withdraw their deposits. To address this risk, commercial banks are obliged to hold some amount of currency to meet deposit withdrawals and other outflows, but using physical banknotes to carry out these large volume transactions would be extremely cumbersome.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

Above all, money guarantees one can pay one’s way, whatever happens. That is why people hold money, despite the costs of doing so, relative to high-yielding assets or desirable goods and services. Money needs to be safe. Indeed, people keep their money in banks because this is normally safer and more convenient than if it is under a mattress. Moreover, people do not just deposit the money they have in banks. As Mr Milne also reminds us, ‘banks create money by lending’.12 Indeed, nearly all the money in a moderately sophisticated modern economy is a by-product of bank lending – the creation of credit – by these private businesses. Banks, in turn, are profit-seeking, risk-taking financial intermediaries. Inevitably, these institutions are least safe during a crisis, which is precisely when everybody is most concerned about their safety. From time to time, worried people will flee to assets deemed safer and more liquid than bank money, such as gold in a world of commodity money or cash and short-term government liabilities in a world of fiat (government-created, from the Latin for ‘let it be made’) money.

Indeed, in almost all countries, government would become a net creditor. Finally, since money creation would no longer need private debt, the level of such debt could fall dramatically. Indeed, in the transition, the government could use the excess of the total supply of money over its own debts to fund a dramatic decline in private debt, through buy-backs. I would add to these benefits that the extinction of conventional bank-created money would almost certainly shrink the financial sector, reduce the aggregate incomes earned by bankers and so improve the distribution of income. The fiscal implications alone would be dramatic. According to an important International Monetary Fund working paper on the Chicago Plan by Jaromir Benes and Michael Kumhof, total bank deposits in the US are around 180 per cent of GDP.41 Assume the demand for money merely grows in line with nominal gross domestic product, at about 5 per cent a year.

Figure 37 shows what happened to US M2, the broadest measure of money the Federal Reserve publishes, after 1980.46 M2 consists of currency held by the public, plus deposit liabilities of financial institutions principally belonging to households. Figure 37 also shows the ‘monetary base’. This consists of currency, again, and the deposits of banks at Federal Reserve banks (that is, the central bank). The monetary base is the government-created money in the system: it is a liability of government. The rest of the money supply is the liability of banks. The monetary base is sometimes called ‘outside money’ and the bank-created money supply ‘inside money’. Until the recent crisis, virtually all M2 was inside money – a by-product of the rapidly expanding lending activities of private financial intermediaries. The monetary base barely grew. In the early years of the crisis, however, lending to the private sector by financial intermediaries shrank. By expanding the monetary base, principally through quantitative easing, the Federal Reserve compensated for the cessation of bank lending to the private sector, thereby keeping M2 growing.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

accounting loophole / creative accounting, Albert Einstein, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, Boris Johnson, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, Kickstarter, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, plutocrats, Plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

And the loan is not created out of deposits: Loans create deposits, not the other way around’ (Pettifor, 2014, p 25). 67 This means that they don’t necessarily wait until they (the bank) first has a certain level of reserves. ‘In the real world, banks extend credit, creating deposits in the process, and look for the reserves later’ (Alan Holmes Senior Vice President, Federal Reserve Bank of New York (1969), cited by Positive Money at http://www.positivemoney.org.uk/how-banks-create-money/proof-that-banks-create-money/). 68 Pettifor (2006), p 56. Geoff Mulgan uses the metaphor of ‘predation’, but in most cases this is too strong: predators kill their victims rather than just free-ride on them: Mulgan, G. (2013) The locust and the bee: Predators and creators in capitalism’s future, Princeton, NJ: Princeton University Press. 69 Ryan-Collins et al (2011). 70 Pettifor (2006), p 62. 71 See David Harvey’s Limits to capital for an analysis of fictitious capital ((1982), London: Verso). 72 As Hudson comments, ‘Finance and banking courses are taught from the perspective of how to obtain interest and asset-price gains through credit creation or by using other peoples’ money, not how an economy may best steer savings and credit to achieve the best long-term development.’

It appeals not to divine or other arbitrary authority but to criteria of fairness and human well-being. Of course, there are defences of interest on credit, but before we consider them, there’s a common misunderstanding of bank lending and where credit comes from that we need to rectify. It’s a misunderstanding that has long allowed the financial sector to escape serious scrutiny, and there’s a risk the delusion may persist. How banks create money for nothing and charge us interest for it The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending. (Martin Wolf)61 I believe it is absolutely fundamental to understand that banks do not intermediate already existing money. They create money and credit ex nihilo, de novo. (Adair Turner, former Chair of the UK Financial Services Authority)62 Capitalism is issuing money to itself and claiming it as profit.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, market clearing, Martin Wolf, means of production, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

Central banking is usually profitable. The central bank creates money at almost zero cost and lends it to the banking sector at interest or it buys interest-bearing securities with the newly created money. This gain usually goes to the state. Obviously, to the extent that the central bank buys government bonds, the government pays interest to the central bank first and then collects the central bank’s profits later. Furthermore, the direct monetization of government debt has been a constituting feature of central banks from the beginning. We have seen that it was one of the key objectives behind the founding of the Bank of England. From the start, the Bank of England was allowed to issue notes against obligations of the Crown. Central banks create money by buying things and paying for them by crediting the account of the seller with newly created money, thus monetizing whatever the central bank buys.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

In each case the result has been the same: a complete gutting of savings and an eventual re-valuation of the currency — in effect, re-setting the value of money from scratch. How does a nation inflate its currency? There are two primary routes: maintaining very low interest rates encourages borrowing (which, with fractional reserve banking, results in the creation of more money); or direct injection by government or central banks of new money into the economy. This in turn can happen via the central bank creating money with which to buy government debt, or by government creating money and distributing it either to financial institutions (so they can make more loans) or directly to businesses and citizens. Those who say we are heading toward hyperinflation argue either that existing bailouts and stimulus actions by governments and central banks are inherently inflationary; or that, if the economy relapses, the Federal Reserve will create fresh money not only to buy government debt, but to bail out financial institutions once again.

But, this “re-set” would give us the opportunity — if we took advantage of it — to restructure our economic and financial systems to be more sustainable and resilient. The second strategy would consist of governments or central banks creating debt-free money. This is how economist Richard Douthwaite, founder of the organization FEASTA and editor of the book Fleeing Vesuvius, describes it: The solution is to have central banks create money out of nothing and to give it to their governments either to spend into use, or to pay off their debts, or give to their people to spend. In the eurozone, this would mean that the European Central Bank would give governments debt-free euros according to the size of their populations. The governments would decide what to do with these funds. If they were borrowing to make up a budget deficit — and all 16 of them were in deficit in mid-2010, the smallest deficit being Luxembourg’s at 4.2 percent — they would use part of the ECB money to stop having to borrow.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

We can thus better understand White not as a Communist spy, but as an American progressive who sought cooperation with Russian Bolsheviks for the grand project of the postwar economic order the American progressives sought. 12 U.S. Department of State, “Volume I” in Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1–22, 1944. 13 Hans‐Hermann Hoppe, “How Is Fiat Money Possible?” Review of Austrian Economics, vol. 7, no. 2 (1994). 14 This is an important but often underappreciated feature of government money. Because banks create money when they issue loans, the repayment of loans or the bankruptcy of the borrower leads to a reduction in the money supply. Money can have its supply increase or decrease depending on a variety of government and central bank decisions. 15 Source: World Bank. 16 Source: World Bank for all countries, and OECD.Stat for Euro area. 17 Source: OECD.Stat. 18 Steve Hanke and Charles Bushnell, “Venezuela Enters the Record Book: The 57th Entry in the Hanke‐Krus World Hyperinflation Table,” Studies in Applied Economics, no. 69 (December 2016). 19 This is termed the Cantillon Effect, after the Irish‐French economist Richard Cantillon, who explained it in the eighteenth century.

But this is not how a capital market functions in any modern economy today, thanks to the invention of the modern central bank and its incessant interventionist meddling in the most critical of markets. Central banks determine the interest rate and the supply of loanable funds through a variety of monetary tools, operating through their control of the banking system.6 A fundamental fact to understand about the modern financial system is that banks create money whenever they engage in lending. In a fractional reserve banking system similar to the one present all over the world today, banks not only lend the savings of their customers, but also their demand deposits. In other words, the depositor can call on the money at any time while a large percentage of that money has been issued as a loan to a borrower. By giving the money to the borrower while keeping it available to the depositor, the bank effectively creates new money and that results in an increase in the money supply.


pages: 151 words: 38,153

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, en.wikipedia.org, Fractional reserve banking, full employment, hydraulic fracturing, income inequality, Jaron Lanier, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Network effects, oil shale / tar sands, Paul Samuelson, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

As long as it holds about 10 percent of its loans in reserve (in case depositors want to withdraw cash), the bank is in compliance with the law. What’s the problem with this? One is that almost all the money in our economy is owed back to banks with interest. This means our overall debt burden is considerably higher than it needs to be. Another is that private banks are walking off with a lot of money that could otherwise flow to us. Instead of letting banks create money by lending it to us, the Treasury or Fed could wire equal dividends to us directly, without interest or principal repayment required. This wouldn’t create any more money than banks now do; it would just create it in a different way.11 Think about the board game Monopoly. Cash is added to the game every time a player passes Go. Absent those infusions, there wouldn’t be enough money to build houses and hotels, and no one would get rich.


pages: 138 words: 40,525

This Is Not a Drill: An Extinction Rebellion Handbook by Extinction Rebellion

3D printing, autonomous vehicles, banks create money, bitcoin, blockchain, Buckminster Fuller, car-free, carbon footprint, clean water, Colonization of Mars, crowdsourcing, David Attenborough, David Graeber, decarbonisation, deindustrialization, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, feminist movement, full employment, gig economy, global pandemic, ice-free Arctic, Intergovernmental Panel on Climate Change (IPCC), job automation, mass immigration, Peter Thiel, place-making, quantitative easing, Ray Kurzweil, Sam Altman, smart grid, supply-chain management, the scientific method, union organizing, urban sprawl, wealth creators

In other words, they are financially, politically and socially addicted to endless growth. Today’s economies are financially addicted to growth because at the heart of the current financial system lies the pursuit of the highest rate of financial return. That in turn puts publicly traded companies under pressure every quarter to show that they have growing sales, growing profits and growing market share. And, since banks create money as debt which bears interest (every time they make a mortgage or a loan), repaying those debts likewise adds to the financial pressure for continual growth. The Economist’s Growth Curve Our economies are politically addicted to growth because pension funds and the job market have become structurally dependent upon it. What’s more, no government wants to lose their place in the G20 family photo, but if their economy stopped growing while the rest kept going, then they would likely be booted out by the next emerging powerhouse.


Financing Basic Income: Addressing the Cost Objection by Richard Pereira

banks create money, basic income, income inequality, job automation, Lyft, new economy, offshore financial centre, Paul Buchheit, quantitative easing, sovereign wealth fund, Tobin tax, transfer pricing, uber lyft, universal basic income, unpaid internship, Wall-E

Since property makes up a major proportion of their balance sheets, a reduction in property prices will affect their capital base. Another approach is to enforce 100% reserve requirements on banks, which would prevent them from creating credit and would restrict them to only loaning out deposits on hand, serving as intermediaries between depositors (savers) and borrowers. If there is any doubt that banks create money, consider that private central banks in the US, EU and Japan have created trillions of dollars in “quantitative easing” a euphemism for (electronic) money printing. This money was then given to banks in exchange for their non-performing assets. Profits for the big four Australian banks (National Australia Bank [NAB], Commonwealth Bank [CBA], Australia and New Zealand Banking Group [ANZ] and Westpac [WBC]) totalled $27 billion (cash basis, 2011–2012), with dividends of $16 billion.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, Ethereum, ethereum blockchain, fiat currency, fixed income, friendly fire, game design, Isaac Newton, Julian Assange, land value tax, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, QR code, quantitative easing, railway mania, Ronald Reagan, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

Many people shake their head incredulously at this. How on earth can it be? Well, banks (not central banks, but so-called ‘private banks’; the likes of HSBC or Wells Fargo) create money when they make loans. Consider the sale of my house. The purchasers took on a mortgage to buy it, as is normal. In issuing the mortgage (for which they took the deeds of the house as collateral), the lending bank created money, which was then paid to me. The funds didn’t come from investors or from the deposits of others. The money did not previously exist. Thus modern electronic money – dollars, pounds and euros – is created through lending. Of course, governments create money through such processes as quantitative easing, but, even so, most money is lent into existence. This power to ‘create’ money through lending is what has made the worlds of banking and finance so large, powerful and rich.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Black-Scholes formula, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, financial innovation, financial intermediation, fixed income, full employment, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, large denomination, locking in a profit, London Interbank Offered Rate, margin call, market bubble, market clearing, market fundamentalism, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Ponzi scheme, price mechanism, price stability, profit motive, Real Time Gross Settlement, reserve currency, risk tolerance, risk/return, seigniorage, shareholder value, short selling, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

Banks and thrifts are in fact the only entities allowed to offer checking accounts, as state and federal laws require that an entity hold a bank charter in order to offer checking accounts. Second, in the course of their lending activity, banks create money. The reason is that demand deposits, which are a bank liability, count as part of the money supply—no matter how one defines that supply, and although the focus on the aggregate growth in the money supply does not grab as much attention as it once did, the supply of money is immensely important in determining economic activity. Just how banks create money takes a little explaining. We have to introduce a simple device known as a T-account, which shows, as the account below illustrates, the changes that occur in the assets and liabilities of a spending unit—consumer, firm, or financial institution—as the result of a specific economic transaction.

The footnotes serve as a useful reference to readers wishing to delve into topics more deeply. PART ONE Some Fundamentals Copyright © 2007, 1990, 1983, 1978 by The McGraw-Hill Companies, Inc. Click here for terms of use. CHAPTER 2 Funds Flows, Banks, and Money Creation Copyright © 2007, 1990, 1983, 1978 by The McGraw-Hill Companies, Inc. Click here for terms of use. As preface to a discussion of banking, a few words should be said about the U.S. capital market, how banks create money, and the Fed’s role in controlling money creation. This will provide background for Chapters 6 and 7, which cover domestic and Eurobanking, and Chapter 9, where we examine in greater detail the Fed’s role. Roughly defined, the U.S. capital market is composed of three major parts: the stock market, the bond market, and the money market. The money market, as opposed to the bond market, is a wholesale market for high-quality, short-term debt instruments, or IOUs.

O’Brien, “The Effects of Mortgage Prepayments on M2,” Finance and Economics Discussion Series, Federal Reserve Board, September 2005. goals is now defunct, having expired in May 2000. In its place, the Fed has gone back to pegging the funds rate and nudging it up or down when it wants to adjust its monetary policy. REVIEW IN BRIEF • In order to understand banking, it is important to have a grasp of funds flows in the capital markets, how banks create money, and the Fed’s role in controlling money creation. • Every spending unit in the economy is constantly receiving and using funds, with some entities running funds surpluses, which finance the funds deficits of other entities. • Historically, households have been the major supplier of funds, channeling their funds to the business sector. In the early 2000s, their roles reversed, and foreign investors took the top spot


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

By lending more to the business sector than flows in as savings from the household sector, the banking system will cause the circular flow to expand, and the price level to rise. When banks are lending more than the public wishes to save, there is no check to the expansion of money and rise in prices. Wicksell asks us to imagine a giant bank that is the source of all loans and in which all the community’s money is deposited. In giving customer A a loan, the bank creates money out of nothing. When A spends the loan, he increases customer B’s deposits in the same bank, the spending of which increases customer C’s deposits, and so on. In other words, the first loan enables prices to rise without limit. As Wicksell said, the upward movement of money ‘creates its own draught’.18 The conclusion suggested by this thought experiment is that governments do not have direct control of the money supply; money in modern economies is created by commercial banks when they make loans.

The context of these discussions was the radical volatility of prices, very different from the muted modulations of the previous century: post-war hyperinflation in some countries being followed by price collapses. John Maynard Keynes and Edwin Cannan debated the causes of the wartime and post-war inflations in a re-run of the Currency versus Banking School debates of the early nineteenth century. Cannan, a professor of economics at the LSE , denied that banks create money. To him they were simply cloakroom attendants, who issued tickets for money deposited with them. It was the central bank that produced the ‘extra’ money. Thus the problem of stopping inflation boiled down to limiting the issue of central bank notes. Cannan wrote as much in his book The Paper Pound, first published in 1919: ‘Burn your paper money, and go on burning it till it will buy as much gold as it used to do!’


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

States with weak public finances lose debt market access and veer toward default (with Greece being the poster boy this time around). Meanwhile, regulatory capital rules—as well as risk aversion to the real economy and lack of loan demand by shell-shocked enterprises and households—have stuffed bank balance sheets with sovereign bonds. Central bank balance sheets are whole multiples of pre-crisis levels due to bad asset purchases and “quantitative easing”—central banks creating money to buy debt securities. Scene Ten The finance crisis seems contained, and states and banks hope for a return to something resembling pre-crisis conditions or recovery while they continue to patch over difficulties ad hoc (e.g., Greece, Ireland, US house prices). Recovery in the real economy and meaningful reductions in unemployment remain elusive. Markets swing wildly from hope (risk-on) to fear (risk-off) on political or corporate-earnings news.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Available at https://www.bbc.co.uk/news/business-15217615 4 TARP was a programme of the US government that helped to stabilise the financial system through a series of measures that included the TARP bailout programme, authorising $700 billion to bail out banks, AIG, and auto companies. It also helped credit markets and homeowners. Quantitative easing (QE) – or large-scale asset purchases – refers to monetary policy that entails a central bank creating money that is used to buy predetermined amounts of government bonds or other financial assets in order to inject liquidity into the economy. 5 Outright Monetary Transactions (OMT) is a programme of the European Central Bank under which the Bank makes purchases (outright transactions) in secondary, sovereign bond markets, under certain conditions, of bonds issued by euro area member states. 6 Balatti, M., Brooks, C., Clements, M.


pages: 286 words: 79,305

99%: Mass Impoverishment and How We Can End It by Mark Thomas

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, additive manufacturing, Albert Einstein, anti-communist, autonomous vehicles, bank run, banks create money, bitcoin, business cycle, call centre, central bank independence, complexity theory, conceptual framework, creative destruction, credit crunch, declining real wages, distributed ledger, Donald Trump, Erik Brynjolfsson, eurozone crisis, fiat currency, Filter Bubble, full employment, future of work, Gini coefficient, gravity well, income inequality, inflation targeting, Internet of things, invisible hand, Jeff Bezos, jimmy wales, job automation, Kickstarter, labour market flexibility, laissez-faire capitalism, light touch regulation, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, Nelson Mandela, North Sea oil, Occupy movement, offshore financial centre, Own Your Own Home, Peter Thiel, Piper Alpha, plutocrats, Plutocrats, profit maximization, quantitative easing, rent-seeking, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, smart cities, Steve Jobs, The Great Moderation, The Wealth of Nations by Adam Smith, wealth creators, working-age population

To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few [the banks] to so many [the UK population].10 The Bank of England could and did – quite quickly and easily – create almost £1 trillion when it wished to save the banking system. However, politicians of all parties continue to assure us that there is no money available for hospitals and flood defences. But government and Central Bank money-creation is only the first and most obvious way that money can be created out of nothing. There is also a less obvious, but far more important, way: private sector banks create money. As Michael McLeay, Amar Radia and Ryland Thomas of the Bank of England’s Monetary Analysis Directorate explained, in a society like the UK that operates a fiat currency: In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.11 As their paper makes clear, 97 per cent of the money in circulation is in the form of bank deposits – which are essentially IOUs from commercial banks to households and companies; only 3 per cent are in the form of currency.


Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

banking crisis, banks create money, barriers to entry, business cycle, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

During the first two decades of the 20th century, the Liberal Party fell under the sway of a group of Guayaquil cacao producers and the trading firms and banks associated with them.7 The party’s control of the government enabled some business figures to divert revenue flows to LONGER-TERM ORIGINS OF ECUADOR’S “PREDOLLARIZATION” CRISIS 23 themselves or their supporters, while the banks extended profitable loans to cover a growing public deficit. The banks created money (there was neither a central bank nor a banking supervisor), causing an inflation problem. This “system” collapsed in the 1920s when a series of external shocks struck the cacao economy. Fungal disease sharply reduced output, while growing cacao exports by British colonies (and later, the onset of the world Depression) drove down world prices. As a result, real wages and incomes fell sharply, and deflation set in.


pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

agricultural Revolution, Airbnb, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, business cycle, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, disruptive innovation, distributed ledger, double entry bookkeeping, Ethereum, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, large denomination, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, technoutopianism, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

In essence, whenever a bank makes a loan it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money (McLeay et al. 2014). There’s no need to go deeper into this mechanism at this juncture, but it is useful to note the following three key points in the Bank of England’s high-level description of the current money-creation regime. Rather than banks receiving deposits when households save and then lending them out, it is bank lending that creates deposits. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities to maintain the resilience of the financial system. In summary, then, it is currently banks who very literally create money, and the ‘rump’ of money that is still in the form of state-issued notes and coins doesn’t matter and will go away.


Green Economics: An Introduction to Theory, Policy and Practice by Molly Scott Cato

Albert Einstein, back-to-the-land, banking crisis, banks create money, basic income, Bretton Woods, Buy land – they’re not making it any more, carbon footprint, central bank independence, clean water, Community Supported Agriculture, congestion charging, corporate social responsibility, David Ricardo: comparative advantage, deskilling, energy security, food miles, Food sovereignty, Fractional reserve banking, full employment, gender pay gap, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), job satisfaction, land reform, land value tax, Mahatma Gandhi, market fundamentalism, mortgage debt, passive income, peak oil, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, reserve currency, the built environment, The Spirit Level, Tobin tax, University of East Anglia, wikimedia commons

Squires ‘Content islanders reject capitalism for traditional trade’, New Zealand Herald, 12 December 2007. 78 GREEN ECONOMICS volume The Ecology of Money explores the history of money creation and makes clear the instability of the present money system, where commercial banks are permitted to lend money to the public, which then accrues value to the banking system as a whole. Here is Porritt’s description of the way that banks create money, and the advantages this gives them: For instance, about 97 per cent of the UK’s money supply is created by commercial banks more or less out of thin air as interest-bearing (profit-making) loans . . .The banks in the UK make about £20 billion a year in interest from this arrangement. … The money supply created in this way is not linked to real resource use or to the amount of goods and services in the national economy – it is based entirely upon the banks’ commercial judgement about the ability of an individual or an enterprise to pay their loans.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

The Oxford Handbook of the Sociology of Finance, Oxford: Oxford University Press; Thompson, H. (2009), “The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac”, Political Quarterly, vol. 80 10 This account draws on: Keynes (1936); Minsky (1986); Shiller (2000); Knight (1921); Haldane, A. and May, R.M. (2011) “Systemic Risk in Banking Ecosystems”, Nature, vol. 469. 11 This account draws on: Jablecki, J. and Machaj, M. (2009) “The Regulated Meltdown Of 2008”, Critical Review, vol. 21; Lockwood, E. (2014) “Predicting the Unpredictable: Value-At-Risk, Performativity, and the Politics of Financial Uncertainty”, Review of International Political Economy, vol. 22; Colander, D. and Haas, A. (2009) “The Financial Crisis and the Systemic Failure of the Economics Profession”, Critical Review, vol. 21; Haldane and May (2011); Lysandrou, P. and Nesvetailova, A. (2015) “The Role Of Shadow Banking Entities in the Financial Crisis: A Disaggregated View”, Review of International Political Economy, vol. 22; Michell, J. (2016) “Do Shadow Banks Create Money? ‘Financialisation’ and the Monetary Circuit”, University of the West of England Economics Working Paper 1602 http://eprints.uwe.ac.uk/28552/1/1602. pdf; Moosa, I. (2010) “Basel II as a Casualty of the Global Financial Crisis”, Journal of Banking Regulation, vol. 11; Tobias, A. and Hyun Song, S. (2009) “The Shadow Banking System: Implications for Financial Regulation”, Federal Reserve Bank of New York Staff Paper 382; Adrias, T. and Ashcraft, A. (2012) “Shadow Banking Regulation”, Federal Reserve Bank of New York Staff Report 559 12 This account draws on: Tooze (2018); Wray (2015); McCabe, P. (2010) “The Cross Section of Money Market Fund Risks and Financial Crises”, Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. 13 This account draws on: Tooze (2018); Michell (2016); Lysandrou and Shabani (2018) “The Explosive Growth of the ABCP Market Between 2004 And 2007: A ‘Search for Yield’ Story”, Journal of Post-Keynesian Economics, vol. 41; Adrian, T. (2013) “Repo and Securities Lending’, Federal Reserve Bank Of New York Staff Reports 529; Acharya, V. and Schnabl, P. (2010) “Do Global Banks Spread Global Imbalances?


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

Like the ECB, the Fed manipulated rates up or down, based on its best guess at the future direction of the economy. Its primary tool was still the “federal funds rate,” the interest rate at which banks lend to one another. No consumer ever borrows at the overnight federal funds rate, but any change in that rate normally ripples through the economy by moving other interest rates. To lower rates, the Fed (or any other central bank) creates money from nothing, a process called “printing money,” even though it is electronic, and uses that money to buy U.S. Treasury securities from the portfolios of the banks. The banks then have fewer securities but more money to lend. This increased supply of money lowers the federal funds rate, the price of money. When the Fed wants to push up rates, it siphons money out of the market by selling government securities from its vast portfolio; this reduces the credit supply and raises the price of money.


The Future of Money by Bernard Lietaer

agricultural Revolution, banks create money, barriers to entry, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, Thomas Davenport, trade route, transaction costs, trickle-down economics, working poor

While it was much mom convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging me spontaneous cooperation that war traditional in the village. Instead, me new money game was generating a systemic undertow of competition among all the participants. This is how today's money system pits the participants in the economy against each other. This story isolates the role of interest - the eleventh round - as part of the money creation process, and its impact on the participants. When the bank creates money by providing you with your Pound 100,000 mortgage loan, it creates only the principal when it credits your account. However, it expects you to bring back Pound 200,000 over the next twenty years or so, if you don't, you will lose your house. Your bank does not create the interest; it sends you out into the world to battle against everyone else to bring back the second Pound 100,000. Because all the other banks do exactly the same thing, the system requires that some participants go bankrupt in order to provide you with this Pound 100,000.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

., the UK’s Royal Bank of Scotland) and industrial firms (e.g., GM and Chrysler in the US) were bailed out with public money. Central banks brought interest rates down to historical lows – for example, the Bank of England cut its interest rate to the lowest level since its foundation in 1694. When they could not cut their interest rates any more, they engaged in what is known as quantitative easing (QE) – basically, the central bank creating money out of thin air and releasing it into the economy, mainly by buying government bonds. Soon, however, free-market orthodoxy came back with a vengeance. May 2010 was the turning point. The election of the Conservative-led coalition government in the UK and the imposition of the Eurozone bail-out programme for Greece in that month signalled the comeback of the old balanced budget doctrine. Austerity budgets, in which spending is cut radically, have been imposed in the UK and in the so-called PIIGS economies (Portugal, Italy, Ireland, Greece and Spain).


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce

The move away from gold and fixed exchange rates allowed three fundamental reflexes of the neoliberal era to kick in: the expanded creation of money by banks, the assumption that all crises can be resolved, and the idea that profits generated out of speculation can go on rising for ever. These reflexes have become so ingrained in the thinking of millions that, when they no longer worked, it induced paralysis. It is news to some people that banks ‘create’ money, but they always have done: they have always lent out more cash than there was in the safe. In the pre-1971 system, though, there were legal limits to such money creation. In the USA, for savings that could be withdrawn at any time, banks had to hold $20 in cash against every $100 of deposits. Even if one in every five people rushed to the bank to take all their money out, there would still be enough.19 At every stage in its design, the neoliberal project removed those limits.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

Ironically, the disastrous big bank behaviour that triggered the 2008 crash forced regulators (especially in Europe) into further lengthening and complicating an already arduous process for obtaining a new licence, frustrating their plans to unleash a hungry horde of ‘challenger banks'. In issuing licences sparingly, governments and central banks were quietly admitting something they were still reluctant to announce publicly: the extraordinary power of private-sector bank lending to affect the pace of money creation, and therefore economic growth. That banks create money is still a highly contested notion. It was politically unmentionable in 1980s America and Europe, where economic policy was predicated on a ‘monetarism' in which governments precisely controlled the supply of money, whose growth determined inflation. Banks traditionally presented themselves purely as financial intermediaries, usefully channelling household depositors' savings into business borrowers' investment.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta analysis, meta-analysis, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

Most money circulating in advanced economies is created by commercial banks, almost literally ‘out of nothing’.31 When a bank agrees to create a loan to a business or a household, it simply enters the amount as a loan on the asset side of its balance sheet and the same amount as a deposit on the liability side of its balance sheet. This deposit is then available to spend on goods and services in the economy. Banks create money by making loans.32 There are a number of important implications of this debt-based money system. One of them is the degree of instability that ensues when things go wrong. Another is that government itself can only finance social investment through commercial (interest-bearing) debt. Another still is that the investment portfolio outlined in this chapter ends up having to compete for credit-worthiness against all sorts of other sometimes unsavoury commercial investments.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

However, the banking sector remained highly fragmented until 1976, when Maine became the first state to legalize interstate banking. It was not until 1993, after the Savings and Loans crisis (see Chapter 5), that the number of national banks fell below 3,600 for the first time in nearly a century. In 1924 John Maynard Keynes famously dismissed the gold standard as a ‘barbarous relic’. But the liberation of bank-created money from a precious metal anchor happened slowly. The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

The banks have created $500 by repeatedly lending your initial investment.8 Although the Fidelity Fiduciary Bank relied just on deposits from its customers (or little boys’ pigeon-food money) to lend, modern banking is much more complex. Put simply, bank lending is not constrained by deposits or reserves. If that were the case, the economy would have halted in its tracks a century ago. Customer deposits are a major source of bank assets, but the relationship between deposits “in” and loans “out” is not direct. In fact, deposits are created by bank loans. To repeat, commercial banks create money, or bank deposits, by making new loans. For example, when a bank makes a mortgage loan, it does not just give someone $100,000 in cash to go purchase a house. Instead, it creates a credit—a deposit—in the borrower’s bank account for the size of the mortgage. “At that moment, new money is created,” explain Bank of England economists; this is “referred to as ‘fountain pen money,’ created at the stroke of bankers’ pens when they approve loans.”9 It works the same in the United States.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

addicted to oil, affirmative action, Amazon Mechanical Turk, anti-globalists, banks create money, big-box store, Bretton Woods, car-free, Charles Lindbergh, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, Kickstarter, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, negative equity, new economy, New Urbanism, Norbert Wiener, peak oil, peer-to-peer, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional, zero-sum game

The conventional money system, the one we use every day, intrinsically supports and rewards competition, antisocial behavior, the destruction of the environment, and the exploitation of people and natural resources. It undermines democracy, as without economic democracy our political democracy can be sold to the highest bidder. It forces people to behave competitively when they don’t want to and would choose not to if they had a real choice. Money is issued through privately owned banks whose fundamental goal is to create profits for their shareholders, not serve the common good of the people. Banks create money as and when they can profit from it, forcing citizens into wage slavery to repay the bank for money it created out of nothing (unbelievable, but true). The expansion and contraction of the money supply locks us into a “boom and bust” cycle of never-ending, unsustainable growth. At some point, a crash is inevitable, and vast amounts of suffering ensue. A healthy, sustainable money system would operate quite differently.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

From his vantage point as editor of The Economist, Bagehot observed the 1866 crisis and drew the conclusion that when faced with a sudden and large increase in the demand for liquidity by the public, in other words a bank run – a ‘panic’ – the responsibility of the central bank was to meet it: ‘a panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it’.40 One of the unique roles of central banks is the ability to create ‘liquidity’.41 Banks create money, but if people lose faith in banks, the ultimate form of money is that created by the central bank – provided it is backed by the tax-raising power of a solvent government. In Germany in October 1923, as the hyperinflation was nearing its peak, the government was close to insolvent with only 1 per cent of its expenditure financed by taxation. Commercial banks have accounts at the central bank, and in a crisis, the central bank can lend to them against the collateral of their assets.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

"Robert Solow", Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

As in aiding an enemy of the state? When I defended Bernanke and the Fed in a Wall Street Journal column, I, too, was attacked by Palin, who argued that “it’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems.” It was as if Palin and others had just discovered that central banks create money—and decided they didn’t like it. The furor over QE2 surprised and puzzled Fed policy makers. The policy was less radical than, say, QE1; after all, central banks have been buying (and selling) government bonds forever. It was telegraphed well in advance, so markets barely moved when it was announced. Yet the political furor was loud and long; some observers even believe it made the Fed more timid in contemplating further QE for a while.


The Great Turning: From Empire to Earth Community by David C. Korten

Albert Einstein, banks create money, big-box store, Bretton Woods, British Empire, business cycle, clean water, colonial rule, Community Supported Agriculture, death of newspapers, declining real wages, different worldview, European colonialism, Francisco Pizarro, full employment, George Gilder, global supply chain, global village, God and Mammon, Hernando de Soto, Howard Zinn, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, joint-stock company, land reform, market bubble, market fundamentalism, Monroe Doctrine, Naomi Klein, neoliberal agenda, new economy, peak oil, planetary scale, plutocrats, Plutocrats, Project for a New American Century, Ronald Reagan, Rosa Parks, sexual politics, shared worldview, social intelligence, source of truth, South Sea Bubble, stem cell, structural adjustment programs, The Chicago School, trade route, Washington Consensus, wealth creators, World Values Survey

The rule of money works all the better for corporate plutocrats because most people are wholly unaware of the ways in which the organizing principles of Empire have become embedded in the money system. The Ultimate Con Recall the observation in chapter 3 that money is simply an accounting chit created out of nothing, without substance or intrinsic value, which has value only because we believe it does and therefore willingly accept it in exchange for things of real value. In modern financial systems, Modern Empire 139 banks create money when they issue a loan. The bank opens an account in the name of the borrower and enters a number representing the amount of the loan in the account. The bank in essence rents to the borrower money it has created from nothing at whatever interest rate the market will bear. It may also acquire a mortgage on the home, farm, or other real property of the borrower. If the borrower cannot make the payments, the bank gets the real property.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

Collectively, the leaders of the G20 nations agreed at a summit in London to pump $1.1trn into the global economy, by extending the ability of the IMF and World Bank to make loans. In addition, central banks kept cutting rates to stimulate borrowing. By the end of 2008, the Federal Reserve’s main rate was 0.25%; just 15 months previously it had been 5.25%. Quantitative easing (QE) also began that year. This involved central banks creating money and using it to buy government bonds. The aim was twofold. First, it prevented the kind of shrinkage in the money supply that occurred in the 1930s. When the central banks bought bonds, the sellers ended up with more money in their accounts. The second aim was to reduce the long-term bond yield as well as the short-term borrowing rate. This cut the cost of borrowing for companies and homebuyers and relieved the financial pressure on the economy.


pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, business cycle, capital controls, Charles Lindbergh, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

Keynes responded to Hopkins on August 3, calling White’s scheme “a tremendous labour to read and digest,” and one that “obviously won’t work.” That same day, he also sent a letter to Phillips, remarking that White’s “actual technical solution strikes me as quite hopeless. He has not seen how to get round the gold standard difficulties and has forgotten all about the useful concept of bank money.” This was Keynes’s notion that the Clearing Union could create new international money out of thin air, just as a bank creates money by lending out its depositors’ funds. “But,” Keynes then offered, “is there any reason why, when once the advantages of bank money have been pointed out to him, he should not collect and re-arrange his other ideas round this technique?” This was classic Keynes thinking: these Americans are in a lamentable muddle, yet once things are explained to them all will be well. “The general attitude of mind,” Keynes graciously conceded, “seems to me most helpful and also enlightening,” however incompetent the exposition.13 Of course, White would not dream of making such a concession.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

The only limit is the requirement for banks to keep a minimum fraction of their deposits as reserves. The banking system that evolved in the Renaissance survives remarkably unchanged to this day. It is the basis of money machines—a financial perpetual motion device. John Kenneth Galbraith summed it up: The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple that the mind is repelled.24 Not everybody supported these developments. In 1802, Thomas Jefferson in a letter to Albert Gallatin, secretary of the Treasury, warned: If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.25 Debt Clock Paper money represents a claim on itself.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

In accordance with its environmentalist language, Douthwaite’s position, too, is based on a certain kind of fear, namely, of the contribution that extant forms of money have been making to the emergence of our “unsustainable, unstable global monoculture” (Douthwaite 2006: 2). On this particular connection, Douthwaite’s argument—in common with the New Economics Foundation in Britain (Ryan-Collins, Greenham et al. 2012)—is that the monetary system as it is currently configured in advanced capitalist countries (with banks creating money as they create loans) supports an economic system that is underpinned by the belief (and corresponding policies) in perpetual growth. Given that interest payments are necessary to service the debts that money consists of, “the economy must grow continuously if it is not to collapse,” and continual growth is unsustainable (Douthwaite 2006: ch. 1). We discussed an analogous logic in David Harvey’s work, discussed in Chapter 2.


pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, commoditize, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, fixed income, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Right to Buy, Ronald Reagan, seigniorage, sexual politics, short selling, Silicon Valley, South Sea Bubble, Thales of Miletus, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor, zero-sum game

It is when this stage in the evolution of Money has been reached that Knapp’s Chartalism—the doctrine that money is peculiarly a creation of the State—is fully realized … To-day all civilized money is, beyond the possibility of dispute, chartalist.27 This does not mean that the state necessarily creates money. Money is credit, it can be brought into being by private contractual agreements (loans, for instance). The state merely enforces the agreement and dictates the legal terms. Hence Keynes’ next dramatic assertion: that banks create money, and that there is no intrinsic limit to their ability to do so: since however much they lend, the borrower will have no choice but to put the money back into some bank again, and thus, from the perspective of the banking system as a whole, the total number of debits and credits will always cancel out.28 The implications were radical, but Keynes himself was not. In the end, he was always careful to frame the problem in a way that could be reintegrated into the mainstream economics of his day.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

But I expect Bernanke was underwhelmed by the magnitude of the change: inflation rose from minus 2.1 percent to a peak of 2.7 percent, and it rapidly fell back to a rate of just 1 percent. That is very little inflationary bang for a large amount of bucks. According to the conventional model of money creation – known as the ‘Money Multiplier’ – this large an injection of government money into the reserve accounts of private banks should have resulted in a far larger sum of bank-created money being added to the economy – as much as $10 trillion. This amplification of Bernanke’s $1.3 trillion injection should have rapidly revived the economy – according to neoclassical theory. This is precisely what President Obama, speaking no doubt on the advice of his economists, predicted when he explained the strategy they had advised him to follow, twelve weeks after he took office: 12.10 The volume of base money in Bernanke’s ‘quantitative easing’ in historical perspective And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?’


The Half Has Never Been Told: Slavery and the Making of American Capitalism by Edward E. Baptist

banks create money, barriers to entry, British Empire, California gold rush, Cass Sunstein, colonial rule, creative destruction, desegregation, double helix, financial innovation, Joseph Schumpeter, manufacturing employment, Monroe Doctrine, moral hazard, mortgage debt, new economy, Ralph Waldo Emerson, Scientific racism, Silicon Valley, South Sea Bubble, Thomas Malthus, trade route, transatlantic slave trade, transcontinental railway, Works Progress Administration

This money has to be paper money, which in the nineteenth century the state-chartered banks printed themselves, or it can be numbers added to borrowers’ credit accounts on a paper ledger, loans against which the borrowers could write checks. Paper is useful, of course, because it is light. With it you can transfer large sums in an envelope, whereas even medium-sized amounts of specie are cumbersome (recall Georgia-man John Springs’s ride north to Maryland’s Eastern Shore in 1806, in which the gold in his saddlebags beat up the sides of his horse).32 But more importantly, bank-created money has to be paper (or mere numbers on paper) because only then can money be created out of nothing. And thus only paper money can lead to real economic growth. Imagine an economy that uses only gold and silver, also known as “specie.” A bank in such an economy could lend no more than it received in deposits, and that bank would simply be a glorified mattress. It would actually reduce the amount of money in circulation.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

"Robert Solow", accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

The most important argument in favor of low but positive inflation (typically 2 percent) is that it allows for easier adjustment of relative wages and prices than zero or negative inflation. 18. The classic theory of Spanish decline blames gold and silver for a certain laxity of governance. 19. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1857–1960 (Princeton: Princeton University Press, 1963). 20. Note that there is no such thing as a “money printing press” in the following sense: when a central bank creates money in order to lend it to the government, the loan is recorded on the books of the central bank. This happens even in the most chaotic of times, as in France in 1944–1948. The money is not simply given as a gift. Again, everything depends on what happens next: if the money creation increases inflation, substantial redistribution of wealth can occur (for instance, the real value of the public debt can be reduced dramatically, to the detriment of private nominal assets).