Re: Harkness and money supply

[Harry Veeder <aa361@xxxxxxxxxxxxxxx>]

On Thu, 18 Sep 1997, Leigh Harkness wrote:

> Harry asks:
>
> >Under the current system how do they increase their money supply without
> >trading?
>
> Bank lending.
>
> If I lend you money, I have to reduce my money (and my spending power) to
> give you money to spend.
>
> But if you borrow from a bank, the bank does not take money out of someone's
> account to give it to you.  What it does is say that you owe me money (that
> is your debt to the bank) and the bank owes you money (that is a deposit.)
> What the bank has done is convert your debt or IOU into a negotiable IOU
> from the bank and that negotiable IOU is money.  That is how the money
> supply is increased without international trade.


But the purpose of bank lending is to facilitate production and trade
becuase people cancel their bank loans by producing and selling goods and
services.  So, in *practice* it is impossible to increase a nations money
supply, through bank lending, without trading of one sort or another.


>
>
> >You can't just ignore the effects of financial trading.
>
> Financial trading does not increas the money supply.  You can ignore it in
> determining the money supply.  Financial traders are just specultating
> against each other and speculating on currencies against real traders
> (providng some stability).

As individuals they may not have much of an effect, but when total the
bank accounts of all such individuals they have a measurable effect on
a nations money supply.

>
>
> >But the money being created is not feeding national agendas it is
> >feeding corporate agendas.  Isn't this implied by your phrase "
> >(nations) socialize the risks."?  It seems to that if people gave more
> >consideration as to why money should be created, profits could remain
> >private without the apparent necessity to "socialize the risks".
> >(eg. What ever happened to the right of a nation's ability to "coin" its own
> >money??)
>
>
> A nation can still coin its own money but coins (an notes) are small change.

I used the word "coin" to suggest a nations right to create money
independent of the banking system. They could be producing electronic
forms too.  I will expand on this in a later post because I feel that
this area of money creation needs to be rethought by economists so that it
doesn't remain "small change."

>
>
> >If the money supply in such countries is not increasing because of trade
> >how else is it happening? I am not saying that it is the result of an "evil
> >capitalist conspiracy", but just that it is the unfortunate consequence
> >of a selective system of money creation whose purpose is to regulate growth
> >among competeting corporations.
>
>
> As explained above, money is growing because of bank lending.

....because more trading is happening?!


>
> Bank lending has always been part of the source of the growth in the money
> supply.  However, under the fixed exchange rate system, international
> transactions provided another source of money.
>

I take it as a truism that trade must happen inside or between countries
in order for banks to lend. According to my truism, I can only concieve of
only two reasons why under a floating exchange system a nations money
supply does not increase by international trading.

1) Bank loans no longer extend beyond national boundries.

or

2) The floating exchange system somehow cancels the effects of
international trading on a nations money supply.

I know that in reality (1) is not happening. However, I do not understand
how (2) could be possible.

Harry Veeder