Luis Enriques might be right about the nef you know.

The first point to make here is that money is not, as orthodox economics would have us believe, a natural phenomenon. Contrary to what you will read in most the textbooks, modern money did not naturally ‘emerge\’ through market forces as a more effective tool for exchange than bartering. Whilst it\’s true that money does enable more efficient exchange, modern money is a creation of the state and has only been with us, in its current form, for less than 160 years. In 1844, the Bank of England Act outlawed the creation of money (then mainly coins and notes) by anyone other than the Bank. Prior to this, a range of private regional and local currencies circulated. Today, there remain a range of ‘complementary currencies\’ existing independently of the state, including commercial currencies such as Air Miles and loyalty points schemes and social currencies that nef has promoted, such as time-banking and the Transition currencies, not to mention a rapidly increasing virtual money scene enabled by the internet.

So we\’re going to use the current and historical existences of a variety of monies, all of which emerged through market actions, as proof that money does not emerge from market actions are we?

Luis Enriques has been known to scream blue bloody murder at the nef for, as a lefty himself, he thinks they are much more dangerous to the lefty cause than they are a benefit. He may well be right.

How does fractional reserve banking work? When you put £100 in the bank a strange thing happens. The bank holds on to a ‘fraction\’ of your deposit (say 1/10th) and lends the remainder out, charging interest upon it. This £90 loan is described as an ‘asset\’ by the bank – it has created it, as if by magic.

Err, no. The bank now has a liability of £100, an asset of £90 and £10 in reserves. Assets plus reserves need to match liabilities: this is something known as \”balancing the books\” and is both something which is taught on page 1 of every text on double entry book keeping and is also something which ever bank does every day.

the great German economist Joseph Schumpeter

Erm, Austrian perhaps, Moravian even, but not German.

In 1914, for example, the Treasury issued ‘Bradbury notes\’ to fund the 1st World War effort. There is no evidence of significant inflationary effects.


However, it can be seen
from Table 10 that the GDP deflator, the retail price index and the money supply all
approximately doubled between 1913 and 1918.

Luis really might be right…..

7 thoughts on “Luis Enriques might be right about the nef you know.”

  1. It’s time we started waging an all out war on the myth of ‘fractional reserve banking’.

    Banks do indeed create ‘money’ out of thin air by ‘splitting the zero’ into a negative and positive number; a debit and a credit; an asset and a liability; matter and anti matter. If you add up all the financial assets and liabilities in the whole world, then the net amount is precisely zero.

    In any event, the fractional reserve is a matter of practicalities – the old fashioned view is that banks should keep 8% of their assets in cash or near cash; the more modern Basel view is that banks should be financed by at least 8% share capital.

    If this ratio were reduced from 8% to 0.8%, the banks assets/liabilities would not magically increase a hundred-fold, as there is an upper limit to the amount that they can lend/take as deposits, which is the lower of a) the amount of debt repayments potential borrowers think they can afford and b) the amount of deposits which people are prepared to put into the banks.

    But you get a minus point for muddling ‘reserves’ with ‘assets’. Physical cash in the safe is an asset, reserves (in an accounting sense) is on the ‘financed by’ side (a non-repayable liability like shares or retained profits).

  2. Nasty use of equivocation there. He starts talking about money as not being a natural phenomena, then suddenly confines his argument to “modern money”, which is only a subset of money, and, to the best of my knowledge, no one denies has a lot of politics in its creation.

    (One can of course call that “natural”, on the basis that humans are as much a part of nature as anything else, and thus anything we do is natural, including building spaceships, and thus calling things “natural” provides no new information).

  3. gah! why bring me into it? You’re more than capable of ripping into nef lunacy solo.

    Is anybody aware of a textbook that describes money solely as a spontaneous invention of the market, and neglect to mention government run central banks?

    What on earth is magic about a bank taking money from A and lending it to B? What is a debt owed by B to a bank if not an asset?

    oh, of course I know what they’re on about, the difference between H and M in those textbooks (well, I mean actually existing textbooks, or at least the ones I read). If there’s magic, it’s in how the system allows A to treat their deposit as
    instantaneously available money, when in fact the bank haven’t got it in their vaults.

    (as it happens, I am sympathetic to critiques of fractional reserve banking, because I like the alternative limited purpose banking. See Larry: The flip side of that is of course if you give your money to a mutual, it’s equity, and you may lose it, and you don’t get any interest if you don’t bear risk. I wonder what the NEF would make of that)

  4. half of the left-wing blog groupsicle, those who know who I am (what, maybe 10 people?) think I’m a “concern troll” as it is.

  5. So how does the money supply expand if not by FRB and the money multiplier? (As explained on first day of Economics 101?)

  6. The money supply is a statistical measure, like most economic indicators (GDP etc) it has some measure of simplification and is to some extent a fiction. So the money multiplier effect increases the money supply: this describes how there is an effect in the economy that is similar to there actually being more money: this doesn’t mean there is in fact more money on a debits and credits basis.

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