97% of our money is created by commercial banks when they make loans, i.e. interest bearing debt, not by the Bank of England or the Mint. Only 3% is created in the form of notes and coins. Thus the profits of creating money go to the commercial banks rather than the public coffers.
Over the last 40 years the commercial banks have increased the money supply at an average of 11.5% a year. And that was obviously too much too quickly. So if the increase in the money supply were say 5% a year, about £60bn a year could go to the government and reduce our taxes by that amount.
Given that the profits of the domestic banking sector are substantially less than £60 billion I\’m not really sure how that could be true.
Quite apart from the fact that the seignorage profits don\’t end up at the commercial banks: even if they did his numbers are still wrong.
The fact that the government needs to raise taxes to fund expenditure is a good thing as it ensures that government spending does not reduce the tax base and instead inceases it.
MMT loons? Whenever I write on the subject they arrive en masse justifying their arithmetical legardemain and claim messiah status for the gurus of our new monetary understanding.
Even my big sister likes them…
Me, on the other hand, I can do maths.
Dinero’s comment above is almost haiku-like in capturing the circular nature of MMT lunacy!
I don’t think anyone is suggesting that the money ‘created’ is profit for the banks. They don’t own the capital. They profit from the interest/rent charged thereon.
Loons or not, I think this particular calculation is bogus.
“I don
t think anyone is suggesting that the money ‘created’ is profit for the banks.”
Indeed they aren’t, including Timmy. So why bring it up? Everyone knows they’re referring to the interest charged on the created money.
There’s nothing bogus about Timmy’s calculation. If the profits of the banking sector are smaller than £60 billion then it’s impossible for gov’t to capture that amount, especially after slowing down the rate of money growth which is supposed to be the thing that generates the profit!
97% seems to have become a popular proportion, for some reason.
pedant2007,
97% consensus on climate change
97% profit for cable companies
97% of money created by banks
I guess it saves having to make up a new number every time. You can just recycle the same number as often as you like.
Also 94% would give completely the wrong impression.
The banks create money proposition has already invaded here ,and after a good thrash-out, involving Frances Coppola who has passed her banking exams ,won. Even TW now admits that the banking system as a whole creates and controls the money supply ;he limits himself to cavilling that an individual bank may not create/make money. Which is obvious and trivial as the saying goes: a bank may create a loan with an unsupported cheque and it may walk out of the door to be spent.But the same bank should receive other banks “loans” (ie entirely new sums of money) when they are spent with the bank’s customers. Sometimes, however the inflow from spent loans does n’t balance the outflow of new loans, making an individual bank insolvent.
This is first-year A level stuff.
If the State issued the unsupported cheques to loan hungry recipients, we could use interest rates for what they already are: a tax on the national money supply, so reducing taxes on productive effort. Or following the James Robertson /Positive Money line descended from the Money Reform plans of the only proper Scientist to look at the problem, Frederick Soddy the Nobel laureate for Chemistry, the government could just create money by sending off unsupported cheques for big infrastructure schemes and to cover its current spending. An end to the ridiculous situation where a government can only spend money it has acquired from taxation of borrowing. Why should governments be the only” honest men” in the equation: it is the banks that are creating new money and saying its a loan from other banks depositors. The present arrangement is a massive fraud but people are too frightened by the size of it and its political implications. You mean we have all been conned for generations? How could that ever happen? The idea is absurd!Its not you know.
The notion that there is a money supply, as in a stock of money is false. The central bank has an interest rate target for the market rate of loans and after that it will supply funds to commercial banks to meet it. The amount of money in circulation depends on the borrowing customers of banks and how they react to the interest rate.
Eh? A Chemistry scientist knows what about finance and money?
How are they a more authoritive voice than say my local bank manager or a security guard with a 1st degree in economics?
>DBC Reed
Bank cheques are not unsupported, they are supported by loan agreements or bonds. It is a fallacy that savers are integral for the generation of loans and currency. What is required is good quality bonds and the future goods and services that those bond represent.
>DBC Reed
As for the government printing and spending its own debt free money , well you would then loose the disipline that government spending does not harm the economy. The fact that government spending requires a tax base is not a burden as government spending is supposed to be beneficial to the economy.
I’ve often thought that certain people could have their education improved by receiving a practical course in double entry…
An end to the ridiculous situation where a government can only spend money it has acquired from taxation of borrowing.
ERROR. The government does and always has enjoy seigniorage revenues. The monetary base is expanded and it’s the government who gets to spend the new money.
yes the government could pay for infrastructure or indeed ministerial biscuits with freshly printed money. What do you think would happen if they did so habitually?
meanwhile, can anybody explain the thinking behind this to me?
” So if the increase in the money supply were say 5% a year, about £60bn a year could go to the government and reduce our taxes by that amount.”
tell me they are not thinking that when banks create money they get to keep the money as revenues?
The whole thesis is flawed anyway as the currency that banks create does not have any value in itself, it only represents the value in the customer’s bonds that are being monetised. So there is nothing for the government to approriate anyway.
ah – I think I see it .
so they argue that if banks were forbidden from creating money, then all monetary expansion must come from creation of base money. If we wanted to expand base money by 5% a year, that would mean printing
… would mean printing £60bn a year (I haven’t checked that figure) which could be spent by govt
profitability of banks not relevant to that argument
> Luis
But there would be no benefit to this 60Bn of liabilaty free and responsabilaty free money
Correction
not money – Spending
Dinero,
that depends on what would happen to prices. It’s not obvious inflation would entirely offset the whole sum.
If the government spending is not revenue restrained then there is no measure of its benefit. It could harm the economy and then, if not revenue restrained, go on to harm it further.
Part of the issue here is the cost of providing banking services.
A current account isn’t just like a banknote. The bank provides free payment services to the customer. It provides debit card, direct debits, bank transfers and so on.
When a customer opens a normal current account with
£100 cash he or she gives the bank an interest-free loan of that £100. The bank can then lend it out. The bank must make enough in interest from these loans to pay for banking services and it’s own profits.
Suppose that all money creation were from the government. In that case banks would be warehouses for cash, they would not be able to lend out cash. Loans could be made but they would have to be funded by issuing of bonds. (They couldn’t be funded by creation of bank accounts, that would be creating money).
In that situation all banks would have to charge fees for all the services they currently provide for free.
current
see point 20 here.
http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech534.pdf
@current #23
Or the Guv could just nationalise the banks and maintain the usual run of services but use interest rates as a tax on money creation. After all banks only stay in business now because of the deposit guarantee by the State You’d just be clearing out the undergrowth by getting rid of the banks which the public does n’t trust one bit and would run on now if it was n’t for the quite hefty State guarantee.
How would that be functionally different from the current system
In the case of loans being funded by issuing bonds the money creation is by the customers of the loan generating bank customers and the bank that buys the bond.
Typo-
In the case of loans being funded by issuing bonds the money creation is by the the loan generating bank customers and the bank that buys the bond.
@ #26 DBC Reed
“After all banks only stay in business now because of the deposit guarantee by the State”
Lefty bullshit
Firstly, before Darling stupidly copied the Irish the deposit guarantee scheme was limited so as to cover unsophisticated small savers, requiring large depositors to do their own homework, and was funded by the participating banks not the government and it worked perfectly well. There had not been a bank run for more than a hundred years while the BoE was supervising banks. Sound well-managed banks do not need a government guarantee.
If you said that to Baron David de Rothschild, current head of the bank, he would politely (noblesse oblige) explain to you that his family has been in the business of providing support *to* governments (including that of the UK) not receiving support *from* governments.
It is noteworthy that the only deposit-taking institution that was actually insolvent and was rescued in 2007/8 was Dunfermline Building Society, located in the constituency of Kirkcaldy and Cowdenbeath. When Northern Rock was expropriated it had net assets (assets in excess of liabilities) in excess of
in excess of GBP 2.5 billion, as even Alastair Darling’s tame accountant admitted. This was after he had tried a couple of dubious tricks such as claiming that the fees that HM Treasury paid to Goldman Sachs were a liability of the shareholders of Northern Rock. The only thing he could do to excuse expropriation was to assume that the BoE would default on its obligation to act as a lender of last resort and that NR would have to make a fire sale of assets at a steep discount to pay off all borrowings.
It is also worth noting that until the late ’90s the gearing (“leverage”) ratio of banks (gross assets: shareholders’ capital) was in the range 12 to 20: under New Labour and the FSA it soared to 50x in a decade.
john77: Anyone who thought Northern Rock was worth 2.5bn had only to promise to repay the money BoE had lent it within three years, and the 2.5bn would be theirs.
No one did.
John Miller, yes, the beauty of double entry accounting, started by the Venetians when gold coins were used as currency. Today you add a January pound to a December pound, which is worth less because of inflation, and you say to yourself, I am good, I am superior, I can do double entry accounting!
The only continent that knows how to do proper double entry accounting is South America, Brazil and Chile in particular, where they add an inflation adjusted December money value unit to a January money value unit.
Luis Enrique. The breakdown of services, some being free and some being charged relates to demand and supply. Depositors and especially large depositors get free services because they supply capital that can be lent out.
DBC Reed. My point here is that there is no mother-lode of revenue waiting for a government that nationalizes the banks. They will either have to provide the services, or customers will have to pay for them. Nothing will come for free.
“use interest rates as a tax on money creation.”
Interest rates are not a tax on money creation and can’t be a tax on that. I don’t understand what you’re talking about above with all your “unsupported cheques”. I don’t think you know very much about banking. In commercial banking assets must back deposits. Deposit insurance is only a small exception to this (and so are unsecured loans). Though deposit insurance certainly does unfairly subsidize the banking industry.
@Current,
Rather than explain the situation yet again with my own faltering words, I would refer you to Murray N Rothbard’s short blast on Fractional Reserve Banking which is all over the Net. Hardly a lefty bullshitter , he has the authority ,even in blowhard right wing circles, such as this, to write “Banks make money by literally creating money out of thin air”. I suspect he knows more about banking than you do, if it comes to that.
Such a treat to get so much conformist ranting in return for such a small outlay in time: we’ve got people on here saying there was nothing wrong with Northern Rock; it was harshly expropriated by a Socialist ; nostalgic yearning for when governments were the clients of Rothschild not the other way a around. And above all there’s nothing wrong with the banks!
Shut your lefty mouth Murray Rothbard: everything’s for the best in the best of all capitalist worlds! And while we’re defending the status quo: stop supporting small shops and attacking Tescos.
(Irony)