Timmy and Ritchie

I am honoured!

Tim Worstall is a man of the highest opinion, of himself.

How kind of you to say so Richard.

As far as I can tell he thinks almost everyone I know who has ever written anything is wrong.

It’s a position he might sustain if he was forever correct.

Unfortunately Tim fails in that objective. There are two good reasons for that. First he never appears to propose anything; he only criticises others. And when he does criticise he either deliberately misses the point, shooting down straw men of his own construction or he is just wrong.

His latest go at me concerns seigniorage: not a subject in common discussion I admit. It is the profit made by a person who creates currency (to put it in a nutshell). I argue that this profit largely arises to our banks. That’s because 97% of all money in use is electronic, and the banks make that. It’s that currency that they created that they have also lost: it’s how there was sufficient money to generate the enormous losses they have suffered.

Then there’s cash: that’s 3% of all money in use. Worstall argues I’m wrong because the profit on the creation of cash always goes to the Bank of England – even when issued by private banks in Scotland and Northern Ireland.

I don’t dispute this point, but when sneering what’s more important – the 97% electronic money to which I referred or the 3% cash with which he tries to defeat my argument?

I don\’t doubt that the banks, utilising this wonderful fractional reserve banking system that we have (and Adam Smith spent a number of pages explaining why it was indeed a good idea) create much of the credit in the system.

However, I do doubt that by creating such credit they earn seigniorage. That\’s the point here. If they do not earn seigniorage through that creation then there\’s no seigniorage to be captured by nationalising the banking system, is there?

That\’s the point that has to be proved. Do the banks in fact make seigniorage? Anyone care to try and prove that they do?

9 comments on “Timmy and Ritchie

  1. Tim, I tend to agree with him on this point: “First he never appears to propose anything; he only criticises others…

    But this whole ‘banks create money’ and ‘seignoriage should be taxed’ is nonsense, firstly because it ignores the fact that banks don’t create ‘money’ they create ‘credit’.

    Secondly, for every mortgage they grant (charging risk free rate plus x%) they also have to credit somebody else (whom they pay risk free rate plus/minus x%), and banks make a profit on the margin – and this 2% margin is either paid out as salaries (liable to PAYE), or is liable to corporation tax, or even possibly higher rate tax if paid out as dividends.

    So for every £100 credit that banks create, the government collects an extra 60p or 80p in various taxes. So there is, AFAICS, a tax on seigniorage already, and thus no need to invent a new tax on top of that.

  2. Saying ‘don’t introduce stupid legislation’ is proposing something.

    Being an ideas man doesn’t just require change.

  3. I suppose it’s just about conceivable that not everyone reads the musings of Mr Wullie Boots on his FT blog. Saith he:-
    “Economic policy is based on a collection of half-truths. The nature of these half-truths changes occasionally. Economics as a scholarly discipline consists in the periodic rediscovery and refinement of old half-truths. Little progress has been made in the past century or so towards understanding how economic policy, rules, legislation and regulation influence economic fluctuations, financial stability, growth, poverty or inequality. We know that a few extreme approaches that have been tried yield lousy results – central planning, self-regulating financial markets – but we don’t know much that is constructive beyond that.

    The main uses of economics as a scholarly discipline are therefore negative or destructive – pointing out that certain things don’t make sense and won’t deliver the promised results. ” See?

  4. My copy of the New Palgrave dictionary of economics defines seignorage as “the excess of the face value over the cost of the production of currency.” It’s so called because “it accrued to the seigneur or ruler who issued the currency, in early times.”
    As banks don’t create currency – except in Scotland – they don’t, strictly speaking, earn seignorage.
    I suppose, though, that you could use the term more loosely, as the profits that come from expanding the broader money supply – which banks certainly do.
    Just trying to help.

  5. Explaining why those who have the ear of policy makers may be wrong is doing something useful, at least for those of us who don’t have the time or/and acedemic background to follow the debates.

  6. Why doesn’t he just say: “okay, perhaps I used the wrong word (seignorage), what I was talking about was fractional reserve banking” – how hard would that be? And then he’s saying banks profit from fractional reserve banking … no shit! Wow, these guys offer such insight.

    This bloke does claim to have done economics doesn’t he – this stuff is usually covered in term 2 of intro macro.

    And why talk about money being ‘electronic’ as if that’s some new voodoo? You can do fractional reserve banking with quill and parchment.

  7. What banks create is “credit money”. Doing this within a fractional reserve system protected by a central bank *is*very much like seignorage. It is called the “Cantillion Effect”.

    This is explained carefully in books on Austrian Economics.

    Folks around here should read some of those.

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