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The Spaniard

Our Means Of Exchange - Money Or Credit?

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Excepting the relatively tiny amount of physical cash in circulation, our de facto means of exchange is the electronic money-numbers that jump from bank account to bank account as we conduct our business. These money-numbers are introduced into circulation when someone borrows them from a bank, after which they circulate until someone pays down bank debt with them, at which point they disappear from circulation.

They are transient bank-credit money-numbers, what we call broad money. Their sum total, the broad money supply which enables the economy to function, must continuously be maintained by new lending as old lending is repaid, otherwise it would shrink indefinitely, with catastrophic deflationary consequences. Thus, at any given point in time, the whole of the broad money supply has been previously lent piecemeal into circulation and there is someone, somewhere paying interest on every pound of it.

The depositors of the very same money-numbers are paid back some interest by the banks, but a mere fraction of that charged. The existence of our means of exchange in this peculiar form thus entails a massive and continuous transfer of money from the money users (that’s us) to the money issuer-lenders. It is an extremely expensive system. For every percentage point of the average interest rate spread on a £2T broad money supply (very roughly the UK figure), the non-banking sector pays £20,000,000,000 p.a. (net) to the banks for the provision of their money-numbers.

After each business day, the banks settle accounts between themselves using other, quite distinct money-numbers which circulate only within the banking system. Unlike broad money, these money-numbers are not borrowed into a temporary existence, instead they have been issued debt-free by the BoE to circulate persistently between the banks. We call them base money. It is conventional not only in banking, but also in academia, the media and government, to regard these base money-numbers as the ‘real’ money in the economy, and the broad money-numbers, the only ones we non-bankers get to use, as a ‘credit’ derivative of them, a promise to pay later in base money.

So, are the banks providing a useful service by extending credit to us, giving us the effective use of the base money that we ourselves don’t have, indeed that we cannot actually access directly?

Or is this a clever and elaborate scheme by which the banks have manipulated us gradually into using a means of exchange that we are forced collectively to borrow from them, and on every pound of which we are obliged to pay them (net) interest?

Are we trapped in a huge rent-a-currency scam?

Assuming that we want a national currency, why don’t we simply have an adequate supply of base money, issued debt-free by all of us acting together, that is issued publicly, to circulate persistently as our means of exchange, a utility for us to conduct our business? Why have we institutionalised an essentially unproductive but hugely expensive cartel of money issuer-lenders to provide and control our means of exchange?

There is an alternative, sensible, low-cost option:

http://www.bankofenglandact.co.uk/

http://www.call4reform.org/

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Excepting the relatively tiny amount of physical cash in circulation, our de facto means of exchange is the electronic money-numbers that jump from bank account to bank account as we conduct our business. These money-numbers are introduced into circulation when someone borrows them from a bank, after which they circulate until someone pays down bank debt with them, at which point they disappear from circulation.

Do they?

Are you sure they don't just go into someone elses account and get spent?

They are transient bank-credit money-numbers, what we call broad money. Their sum total, the broad money supply which enables the economy to function, must continuously be maintained by new lending as old lending is repaid, otherwise it would shrink indefinitely, with catastrophic deflationary consequences. Thus, at any given point in time, the whole of the broad money supply has been previously lent piecemeal into circulation and there is someone, somewhere paying interest on every pound of it.

I don't remember ever offering broad money to anyone. I asked on the street and got blank looks all around. :)

The depositors of the very same money-numbers are paid back some interest by the banks, but a mere fraction of that charged. The existence of our means of exchange in this peculiar form thus entails a massive and continuous transfer of money from the money users (that’s us) to the money issuer-lenders. It is an extremely expensive system. For every percentage point of the average interest rate spread on a £2T broad money supply (very roughly the UK figure), the non-banking sector pays £20,000,000,000 p.a. (net) to the banks for the provision of their money-numbers.

Could just email it in.

After each business day, the banks settle accounts between themselves using other, quite distinct money-numbers which circulate only within the banking system. Unlike broad money, these money-numbers are not borrowed into a temporary existence, instead they have been issued debt-free by the BoE to circulate persistently between the banks. We call them base money. It is conventional not only in banking, but also in academia, the media and government, to regard these base money-numbers as the ‘real’ money in the economy, and the broad money-numbers, the only ones we non-bankers get to use, as a ‘credit’ derivative of them, a promise to pay later in base money.

So, are the banks providing a useful service by extending credit to us, giving us the effective use of the base money that we ourselves don’t have, indeed that we cannot actually access directly?

Or is this a clever and elaborate scheme by which the banks have manipulated us gradually into using a means of exchange that we are forced collectively to borrow from them, and on every pound of which we are obliged to pay them (net) interest?

Are we trapped in a huge rent-a-currency scam?

Assuming that we want a national currency, why don’t we simply have an adequate supply of base money, issued debt-free by all of us acting together, that is issued publicly, to circulate persistently as our means of exchange, a utility for us to conduct our business? Why have we institutionalised an essentially unproductive but hugely expensive cartel of money issuer-lenders to provide and control our means of exchange?

There is an alternative, sensible, low-cost option:

http://www.bankofenglandact.co.uk/

http://www.call4reform.org/

How long will you be putting me in prison, merely for disagreeing with you?

That's the real question.

Edited by Injin

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How long will you be putting me in prison, merely for disagreeing with you?

That's the real question.

Hi Injin.

Could we agree for this thread not to be drawn into the more general and overarching matter of the eternal, complex tension between the individual and the collective?

I agree that it is 'the real question', in that it trumps any particular sub-question of itself, such as the money question.

However, what I would like is a grown-up discussion on the merits and demerits of alternative and feasible national monetary systems. Please note my earlier qualifying phrase 'assuming that we want a national currency'.

Edited by The Spaniard

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There is an alternative, sensible, low-cost option:

http://www.bankofenglandact.co.uk/

http://www.call4reform.org/

seems like a better idea to me

link

Most people suppose, without having thought much about it, that money must be provided by government. That belief comes in for a sound thrashing in University of Georgia professor George Selgin’s book Good Money, which tells the story of Britain’s experience with private coinage during the Industrial Revolution. Selgin’s research shows that the government had failed to produce enough money of small denominations, how private enterprise solved the problem, and finally how the government reasserted its monopoly to put an end to the nation’s free-market money episode.

Good Money has an intriguing origin. While reading a book by nineteenth-century British economist William Stanley Jevons, Selgin came across a passage taking issue with Herbert Spencer’s argument that the production of money could be entrusted to the free market. Jevons wrote that in his view “there is nothing less fit to be left to the action of competition than money,” adding that the nation’s experience with privately minted coins in the late eighteenth century “amply confirmed” his opinion. Selgin wanted to know just what that experience was and investigated: “What I discovered amazed me, not the least because, instead of confirming Jevons’s position, it did just the opposite.”

Among other great changes it brought, the Industrial Revolution caused a huge increase in the demand for money. In pre-industrial England relatively few workers were paid money wages. As industrialization increased, however, more workers left feudal agriculture for manufacturing employment, and business owners had to pay them in money. But because there was a shortage of small coins, factory owners had to devote a lot of time and effort to coming up with the money necessary to meet their payrolls. Furthermore, much of the money they were able to acquire was questionable because many coins were badly worn, had been clipped (some of the metal had been sheared away), or were counterfeit.

The Royal Mint was indifferent. Its job was to coin money—mostly gold—for the upper classes. It wasn’t averse to silver, but no silver had been coined for decades before 1775. The culprit was that favorite of economics professors, Gresham’s Law. The government’s official rate for silver was well below the market price elsewhere in Europe, so silver flowed out of the country. Selgin here performs a valuable service in explaining the true meaning of Gresham’s Law. It is not that “bad money drives out good money,” but rather that when government artificially overvalues one kind of money relative to another, people will spend the overvalued and hoard or export the undervalued.

What about copper coins for small transactions? The Royal Mint hadn’t bothered coining copper for years. Small change was regarded as “unworthy” of the highbrow mint since copper was merely money for the common folk.

In 1761 copper was discovered on Anglesey Island, off the coast of Wales, and within a few years over a thousand miners were employed there. Owner Thomas Williams faced the problem discussed above—how to come up with enough coins to pay his men.

Williams approached the government with a plan to collaborate in the production of new copper coins, but it wasn’t interested. So he began producing his own coins. They were exquisite, but the key thing was that they were accepted as payment by the workers, then in trade by merchants. Soon the coins were circulating on the mainland. Williams heightened demand for his product by stamping on them that they were promises to pay and setting up redemption offices in London and Liverpool. People’s confidence in this new money rapidly grew.

So great was his success in coinage that Williams soon opened another mint and employed experts to improve efficiency. Private enterprise brought the high technology of the day to the business of making money while the government continued using old-fashioned methods.

Eventually other coin producers entered the market, offering quite a variety of money. It wasn’t uniform, but businesses and workers adapted without difficulty. Almost 200 years before F. A. Hayek’s advocacy of choice in currency, the British had it.

The story, alas, has an unhappy ending. By 1812 Royal Mint officials wanted their monopoly back and Parliament obliged in 1813

Edited by lowrentyieldmakessense(honest!)

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Hi Injin.

Could we agree for this thread not to be drawn into the more general and overarching matter of the eternal, complex tension between the individual and the collective?

I agree that it is 'the real question', in that it trumps any particular sub-question of itself, such as the money question.

However, what I would like is a grown-up discussion on the merits and demerits of alternative and feasible national monetary systems. Please note my earlier qualifying phrase 'assuming that we want a national currency'.

Sure, lets assume we want a national currency.

How long are you going to put me in prison to get one?

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IMO, you are looking at this from the wrong perspective.

Their sum total, the broad money supply which enables the economy to function, must continuously be maintained by new lending as old lending is repaid, otherwise it would shrink indefinitely, with catastrophic deflationary consequences.

Firstly, I disagree that the broad money (credit) supply would shrink indefinitely, but rather up until the point where it was beneficial for credit to be extended again. The problem is, we have put so many props under the system, taking it such a high level, that this point is a long way down. Would this have happened without all the central bank and government support? No, it would have shrunk decades ago.

Secondly, would credit be considered the same as money, if all savings were viewed as the risk bearing investments that they are? Bank credit is only viewed as money because of the central bank and government actions. Would people have trusted the banks with such a large amount of cash to use as capital to extend credit from, had that support been absent? No, people would have voted with their feet decades ago.

Thirdly, had the government not been spending more than they had been taxing, there would be no need for the government to borrow. Had they not run a deficit year on year, by borrowing from savers, pension funds and foreign investors (via the gilt market), the government would not have a huge national debt to service. Before it's mentioned, population growth has been about 0.3% for the last couple of decades, which results in less than £200m of new base money if population adjusted - hardly the sort of figure which is going to make/break a country if it is/isn't covered. In summary, would there be a need to print to pay off the national debt (default on those who leant the government money), had the government balanced its books? No, there would be no national debt to pay off.

Fourthly, had the government not set a positive price inflation index target, the credit supply would not have been encouraged to grow. By not considering inflating house prices, the government also encouraged the banks to inflate property prices. Would this have happened had the price inflation index target been zero, while including house prices? No, credit expansion would have been kept in check.

Fifthly, had the government not been using fiat currency, they could not have printed additional money, in order to soft default on their debts (or the bankers' debts). Would this have been possible without fiat currency? No, losses would have to be born and cuts would have to be made, to balance the books.

As the government and central bank actions are at the heart of the problem, why do you keep pointing to the banks as the bad guys? They have just played the game which the government have let and even encouraged them to play. Maybe the government are their puppets, but why then would you expect them to stand up to the banks' demands this time around?

I'm not trying to defend the bankers for their actions, as they were surely greedy and knew this would happen. If they didn't, then their risk assessment was poor anyway and they deserved to fail. However, trying to fix the above problems by addressing the symptoms caused by the above government policy is surely not the answer. You can't remove banking risk and to try to just lines up a bigger bust in the future. Surely, it is better to have a system which ebbs and flows, rather than growing for decades, followed by a depression. We need a system which can breath, not forever inhale until it can do so no more.

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whats wrong with a free market in money

Too messy for some.

tinkering with the current system seems pretty pointless to me

Arguing about what colour tablecloth the captains table should have as the titanic slips beneath the waves.

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Do they?

I don't remember ever offering broad money to anyone. I asked on the street and got blank looks all around. :)

--Yup they do

---Have you ever written a cheque, or used a debit card? If so then you have. Ask them if you can pay by debit card, they'd be more receptive.

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--Yup they do

---Have you ever written a cheque, or used a debit card? If so then you have. Ask them if you can pay by debit card, they'd be more receptive.

You mean when they get some money allocated to them from the banks vault?

The general assumption is of a 1:1 relationship between numbers on a screen and notes/coins.

Not 97:3

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Too messy for some.

Arguing about what colour tablecloth the captains table should have as the titanic slips beneath the waves.

Yup, the 'experts' (and government) seem to think they can make risk, risk free, thus guaranteeing returns on investments. It's impossible.

The economy will grow and shrink, along with peoples' propensity to save or spend. The best we can do, is to let a system develop which can cope with this, without breaking periodically. If we don't, it will break sooner or later, likely in a more spectacular way.

EDIT: Typo

Edited by Traktion

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Yup, the 'experts' (and government) seem to think they can make risk, risk free, thus guaranteeing returns on investments. It's impossible.

The economy will grow and shrink, along with peoples' propensity to save or spend. The best we can do, is to let a system develop which can cope with this, without breaking periodically. If we don't, it will break sooner or later, likely in a more spectacular way.

EDIT: Typo

We don't guarantee our investments with the Proposed Bank of England Act. The investment account guarantees are from the banks, not the government.

Emergency bailout loans are temporarily created money to protect you from mistakes made by your bank, if the government deems it to be necessary and appropriate.

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We don't guarantee our investments with the Proposed Bank of England Act. The investment account guarantees are from the banks, not the government.

Emergency bailout loans are temporarily created money to protect you from mistakes made by your bank, if the government deems it to be necessary and appropriate.

What debt instruments are you going to monetize? I never got an answer.

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whats wrong with a free market in money

tinkering with the current system seems pretty pointless to me

A Free market in money has been tried before, it doesn't work and would lead to massive inefficiency in the economy. In our reform we allow alternative currencies, but unless the government expressly permits otherwise, your taxes will still need to be paid in sterling.

I'm not interested in any debates about whether taxation or fiat money is right or wrong. If you don't like it, don't vote for our reform - or avoid living in a society where taxation is necessary.

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We don't guarantee our investments with the Proposed Bank of England Act. The investment account guarantees are from the banks, not the government.

Emergency bailout loans are temporarily created money to protect you from mistakes made by your bank, if the government deems it to be necessary and appropriate.

Yes, you want to threaten millions of human beings in an effort to create paradise.

let me know how it works out for you, comrade.

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A Free market in money has been tried before, it doesn't work and would lead to massive inefficiency in the economy. In our reform we allow alternative currencies, but unless the government expressly permits otherwise, your taxes will still need to be paid in sterling.

Extortion, lovely.

I'm not interested in any debates about whether taxation or fiat money is right or wrong. If you don't like it, don't vote for our reform - or avoid living in a society where taxation is necessary.

What's his like or dislike got to do with the morality of it?

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Demand liabilities.

What happens when the rest of the debt exotica matures (and not just bank held instruments)?

Things like asset backed commercial paper, MBSs, CDOs, junk bonds, corporate bonds, asset backed securities, foreign currency bonds, commercial paper.

Currently, as these debt instruments mature the funds if held privately get lent back to the banking system.

In your world these will be ring-fenced and warehoused - and the added "incentive" of a supposed stable currency requiring less search-for-yield - and risk free too !

Have you checked the amount outstanding in these markets?

Edited by Alan B'Stard MP

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IMO, you are looking at this from the wrong perspective.

Firstly, I disagree that the broad money (credit) supply would shrink indefinitely, but rather up until the point where it was beneficial for credit to be extended again. The problem is, we have put so many props under the system, taking it such a high level, that this point is a long way down. Would this have happened without all the central bank and government support? No, it would have shrunk decades ago.

Secondly, would credit be considered the same as money, if all savings were viewed as the risk bearing investments that they are? Bank credit is only viewed as money because of the central bank and government actions. Would people have trusted the banks with such a large amount of cash to use as capital to extend credit from, had that support been absent? No, people would have voted with their feet decades ago.

Thirdly, had the government not been spending more than they had been taxing, there would be no need for the government to borrow. Had they not run a deficit year on year, by borrowing from savers, pension funds and foreign investors (via the gilt market), the government would not have a huge national debt to service. Before it's mentioned, population growth has been about 0.3% for the last couple of decades, which results in less than £200m of new base money if population adjusted - hardly the sort of figure which is going to make/break a country if it is/isn't covered. In summary, would there be a need to print to pay off the national debt (default on those who leant the government money), had the government balanced its books? No, there would be no national debt to pay off.

Fourthly, had the government not set a positive price inflation index target, the credit supply would not have been encouraged to grow. By not considering inflating house prices, the government also encouraged the banks to inflate property prices. Would this have happened had the price inflation index target been zero, while including house prices? No, credit expansion would have been kept in check.

Fifthly, had the government not been using fiat currency, they could not have printed additional money, in order to soft default on their debts (or the bankers' debts). Would this have been possible without fiat currency? No, losses would have to be born and cuts would have to be made, to balance the books.

As the government and central bank actions are at the heart of the problem, why do you keep pointing to the banks as the bad guys? They have just played the game which the government have let and even encouraged them to play. Maybe the government are their puppets, but why then would you expect them to stand up to the banks' demands this time around?

I'm not trying to defend the bankers for their actions, as they were surely greedy and knew this would happen. If they didn't, then their risk assessment was poor anyway and they deserved to fail. However, trying to fix the above problems by addressing the symptoms caused by the above government policy is surely not the answer. You can't remove banking risk and to try to just lines up a bigger bust in the future. Surely, it is better to have a system which ebbs and flows, rather than growing for decades, followed by a depression. We need a system which can breath, not forever inhale until it can do so no more.

1) Ok, but it would still shrink to catastrophic levels.

2) Depends on how much people know about what and what isn't money, you can't assume 100% knowledge of the difference between money and credit. Back when there was no support from government, fractional reserve banks failed all the time, what would be different nowadays?

3) Doesn't change the current situation, the government has had to borrow to meet it's policy targets, because the money has not been there from taxation as we are all now so poor in real terms (a house would have cost you equivalent of £88,000 in 1950) - and the government can't tax the super rich as they will move their assets and taxable wealth elsewhere. We are in this situation, why does not matter, we need to get out of it and we have to pay one way or another, whose fault it is does not matter, getting out of it does.

4) A pointless debate, it's happened now, we know why, we can change the situation we are currently in by enacting our reform.

We aren't blaming anybody here really, who is responsible is not our concern, of course we know bankers only play within the system, but we also know that the system has been exploited and milked for all it can be, so we need to change it. Setting in place clear, simple reform, like ours, will prevent both government and banking from abusing it at the expense of the taxpayer.

I've replied to a number of your concerns on the other topic Traktion, maybe you could respond to those in this thread?

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A Free market in money has been tried before, it doesn't work and would lead to massive inefficiency in the economy. In our reform we allow alternative currencies, but unless the government expressly permits otherwise, your taxes will still need to be paid in sterling.

yep the controllers dont like free markets - when didnt it work and when was it tried

inefficiency dont think so - thefts and violence would reduce though

you appear to want to replace one set of controllers with another - that may well be an improvement but it isnt the best solution

I'm not interested in any debates about whether taxation or fiat money is right or wrong. If you don't like it, don't vote for our reform - or avoid living in a society where taxation is necessary.

why is forced taxation necessary

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yep the controllers dont like free markets - when didnt it work and when was it tried

inefficiency dont think so - thefts and violence would reduce though

you appear to want to replace one set of controllers with another - that may well be an improvement but it isnt the best solution

why is forced taxation necessary

We are trying to achieve a realistic solution to a number of problems, not utopia.

One thing at a time, there's no reason further reforms can't be enacted at a later date, contrary to what some of you here believe, this isn't the Enabling Act of 1933.

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yep the controllers dont like free markets - when didnt it work and when was it tried

inefficiency dont think so - thefts and violence would reduce though

you appear to want to replace one set of controllers with another - that may well be an improvement but it isnt the best solution

why is forced taxation necessary

We are trying to achieve a realistic solution to a number of problems, not utopia in one easy reform, if on a hot day somebody offered you a free vanilla ice cream, but you really wanted a chocolate one as vanilla isn't quite your favourite, would you get angry with them and turn them down?

One thing at a time, there's no reason further reforms can't be enacted at a later date, contrary to what some of you here believe, this isn't the Enabling Act of 1933.

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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