[Pen-l] Re: money [was: Skidelsky on Keynes

["Jim Devine" <jdevine03@xxxxxxxxx>]

John Vertegaal wrote:
> I'm still waiting for some economist to explain how money after having been
> created out of nothing, when someone at an issuing bank accepts a promissory
> note to have it paid back with interest later, turns into a positive, free
> and clear "thing", different from representing a to be repaid debt.

If Bush is the "decider," I like to think of myself as the "explainer"
(largely because I like to explain things to myself, to clarify my
thinking). Here, I'm only referring to the case in the US.

First, in a market system, fiat money has a price above zero (that is,
it can actually buy goods, services, and assets) because the central
bank (as agent of the state) keeps it scarce.

Then, there's the bookkeeping money that banks issue, when they lend,
the "promissory note[s] to have it paid back with interest later."
This is first and foremost backed by fiat money (bank reserves). It is
also based on faith in the debtors, who are promising to pay back.
It's also based on faith in the banks who "borrow" our deposits to
make the loans.

What keeps the faith in the debtors and the banks? It's deposit
insurance and bank regulation (examination, etc.) Regulation includes
that by the Fed (reserve requirements, etc.) Without regulations,
banks could expand the amount of bookkeeping money to the extreme (via
the "money multiplier" process), undermining the scarcity of
bank-issued money and its positive price. The regulators also prevent
easy entry into the banking industry, reinforcing this result.

The Fed should be thought of as a government-sponsored cartel of
bankers that allows the banks to profit by borrowing deposited money
at low interest rates and then lending it at higher rates. It allows
them to "create" bookkeeping money (i.e., credit).

In the end, the banks are able to do their deeds because they're
allowed to do so by an agency of the US government.  It's all based on
the coercive power of the state. However, it might be justified as
allowing the expansion of commerce without continual price declines
(as under the gold standard).
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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