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)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, 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, 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

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, 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, Mexican peso crisis / tequila crisis, 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: 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

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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, Bretton Woods, 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, 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, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, 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

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

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, 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, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Plutocrats, plutocrats, 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, Winter of Discontent, working poor, Yom Kippur War

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

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Long Term Capital Management, market clearing, Martin Wolf, means of production, 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

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, 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, invisible hand, Isaac Newton, Kenneth Rogoff, late fees, 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, post-oil, 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, working poor

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: 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

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Alfred Russel Wallace, banks create money, Buckminster Fuller, collective bargaining, 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, 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, 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: 183 words: 17,571

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

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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, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, 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, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, moral hazard, mortgage debt, mortgage tax deduction, 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

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: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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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 blockchain, fiat currency, friendly fire, game design, Isaac Newton, Julian Assange, 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, quantitative easing, railway mania, Ronald Reagan, 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: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, correlation does not imply causation, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

They say the process whereby banks lend out the majority of funds entrusted to them is fraudulent, that it multiplies money in a destructive, inflationary fashion. Perhaps surprising is that members of the free-market Austrian school are the biggest critics of banks lending out the majority of deposits they take in. As the late Murray Rothbard, a true-blue Austrian, long ago put it, “Fractional reserve banks . . . create money out of thin air. Essentially they do it in the same way as counterfeiters.”2 Underlying Rothbard’s assertion is a fanciful belief that the alleged “money multiplier” is fact. It’s fiction. Wise minds quickly understand that there’s no such thing as a “money multiplier.” Bank A cannot take in $1,000,000 and lend out $900,000 to an individual who deposits at Bank B, which then lends out $810,000 to an individual who deposits at Bank C, only for Bank C to lend out $729,000 such that $1 million in deposits miraculously turns into nearly $2.5 million.

 

pages: 350 words: 109,220

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

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Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, 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.

 

pages: 385 words: 111,807

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

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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, 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, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, 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, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, 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, 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

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, 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, Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, 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, payday loans, 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, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, wages for housework, 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.

 

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

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banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, 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, 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.

 

The Future of Money by Bernard Lietaer

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agricultural Revolution, banks create money, barriers to entry, Bretton Woods, clean water, complexity theory, 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 market place, the payments system, 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: 471 words: 124,585

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

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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, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, 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, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, 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, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, 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: 566 words: 155,428

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

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, 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, 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.

 

pages: 422 words: 131,666

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

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, 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, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, new economy, New Urbanism, Norbert Wiener, peak oil, 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

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: 424 words: 121,425

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

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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, 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.

 

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

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Albert Einstein, banks create money, big-box store, Bretton Woods, British Empire, clean water, colonial rule, Community Supported Agriculture, death of newspapers, declining real wages, European colonialism, Francisco Pizarro, full employment, George Gilder, global supply chain, global village, Hernando de Soto, Howard Zinn, informal economy, 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, Ronald Reagan, Rosa Parks, South Sea Bubble, stem cell, structural adjustment programs, The Chicago School, trade route, Washington Consensus, 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: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

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Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, 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, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Ronald Reagan, seigniorage, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor

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: 741 words: 179,454

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

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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, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, 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, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, 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, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, 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, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, 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 Feynman, Richard Thaler, 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, 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, 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 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

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

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, 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, Kula ring, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, 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, Wave and Pay, 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: 823 words: 220,581

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

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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, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, 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, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, invisible hand, iterative process, John von Neumann, 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, open economy, 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

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?’

 

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

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Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, 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, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, 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: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, 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, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, 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, very high income, We are the 99%

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).