Re: General Theory Seminar--Moore

[mike sproul <msproul@xxxxxxxx>]

Here is a view of money that clarifies many of the problems raised by
John and Basil:

When a bank issues a checking account with one dollar in it, the bank
is, in effect, issuing a call option on a dollar (i.e., on a Federal
Reserve note), with an exercise price of zero. The customer has the
right, upon presentation of his call option, to demand one green paper
dollar from the bank in exchange for a payment of zero. In the same way,
stockbrokers can issue call options on GM stock that have an exercise
price of zero. These options would give the customer the right to buy
one share of GM from the broker for a price of zero. If GM sells for $60
per share, then the call option would also sell for $60. Similarly, the
call option on a green dollar has the same value as the green dollar.

Stock traders refer to genuine shares of GM as base shares, and call
options with zero exercise price are referred to as derivative shares.
More generally, a DERIVATIVE security is a CLAIM to some other security.

My suggestion is to refer to green dollars as BASE dollars, and to bank
deposits as DERIVATIVE dollars. Then see how far you can push the
analogy to base GM stock and derivative GM stock.

For starters, when a stockbroker issues derivative shares of GM stock,
has he increased the quantity of GM stock?
No; The quantity of genuine shares is the same as before. There are more
derivative shares, but these are the liability of the broker--not of GM.
Has the issue of derivative shares affected the value of genuine GM?
No; The number of genuine shares is unaffected, and these are the only
kind recognized as GM's liability.

So, back to money: When a banker issues a checking account (a derivative
dollar) has he increased the supply of money?
Yes; he has increased the supply of the stuff used to make payments, but
he has not increased the supply of green dollars.
Since the banker increased the supply of "money", did he cause
inflation?
No; The number of green dollars is unaffected, and these are the only
kind of dollars recognized as the Federal Reserve's liability.

As for the question of what is money and what is not, consider the
following:

A goldsmith accepts 100 ounces of gold on deposit and issues 100
convertible notes in exchange. He has done nothing to the money supply
(since he locked up 100 ounces as he issued 100 notes) and nothing to
the price level. Next, he lends 100 newly-printed notes to a farmer,
getting a lien of the farm in exchange. He has now increased the supply
of DERIVATIVE money, but each note is still worth an ounce of gold,
since the 100 new notes are backed by a lien worth at least 100 ounces.

Now some other banker takes 100 of the first banker's notes on deposit
and issues a checking account in exchange. He has done nothing to the
money supply, since he locked up 100 notes as he issued the checking
account. Next, this new banker lends 100 units of money ("dollars") to a
butcher by crediting $100 to the butcher's checking account. He has now
further increased the (derivative) money supply, but each dollar is
still worth 1 ounce of gold.

As for some of the points made by John:

"Deposits are not the article of settlement for debt owed."
--False; A debt can be settled with a checking account dollar, a paper
dollar, or an ounce of gold.

"Individuals do not create money any more than banks do..."
--False; Both of the above bankers created money, and even individuals
can create money--if they are respected enough for people to accept
their IOU's in payment.

I have a paper on this for anyone who is interested:

http://www.csun.edu/~hceco008/rbd2000.doc

written in MS word.

Regards,

Mike Sproul




John O'Donnell wrote:
>
> Basil Moore wrote:
> >
> > John I am confused by several passages. I will reply in CAPS
> >
> > At 07:58 AM 2/24/00 -0800, you wrote:
>
> <<SNIP>>
>
> > >Banks do not create "money" except by a very misleading
> > >definition of money.
>
> > BANKS IN MY VIEW CREATE MONEY WHENEVER THEY MAKE A LOAN, AND ISSUE THEIR
> > OWN LIABILITY (DEPOSITS, WHICH ARE A MEANS OF PAYMENT AND SO MONEY) IN
> > EXCHANGE FOR THE BORROWERS' LIABILITY (IOU) WHICH IS NOT GENERALLY ACCEPTED
> > IN EXCHANGE. I AM DEFINING MONEY AS MEANS OF PAYMENT, THE THING THAT IS
> > GENERALLY ACCEPTED IN EXCHANGE AND AS SETTLEMENT OF LEGAL DEBT OBLIGATIONS.
>
> That [I AM DEFINING MONEY AS MEANS OF PAYMENT, THE THING THAT IS
> GENERALLY ACCEPTED IN EXCHANGE AND AS SETTLEMENT OF LEGAL DEBT
> OBLIGATIONS.] is the definition I prefer, but it is not the
> definition that calls deposits part of the money supply.
>
> "Deposits" are not the article of settlement for debts owed.
> Debts are settled by the transfer of money [either fiat or
> substance] at the direction of the depositor. If the recipient
> of a loan chooses to deposit his proceeds immediately upon
> receipt of the bank's obligation that is his choice. It does not
> change the deposit into "money" except in the misleading
> definition used in compiling monetary aggregates.
>
> It is the failure to make the distinction between money itself
> and its many substitutes, most prominent of which is
> intermediated credit, that obfuscates most discussions of money
> and monetary policy.
>
> > >They only intermediate the creation of credit. Credit can be
> > >created by anyone at any time without license from government
> > >and without the availability of money.
>
> > NO. YOU AND I CAN LEND, BUT CANNOT CREATE MONEY IN THE PROCESS, AND SO
> > CANNOT INCREASE AD. I CAN ONLY LEND TO YOU MY SAVINGS, INCOME THAT I DO NOT
> > CONSUME MYSELF.
>
> True, individuals do not create "money" any more than bank's do
> and I didn't say they do. They create money substitutes [credit]
> just as banks do. The transferability of a money substitute
> depends entirely on the reputation of the issuer of the promise
> and/or any intermediator who may add his guarantee to that of
> the original issuer.
>
> A bank's greater ability to swallow defaults on obligations to
> it gives the bank's promise of payment greater acceptability but
> it is just as subject to the condition of actually making the
> transfer of money as are private promises. Giving a "Pay to the
> order of ____" instruction to a bank does not release a debt.
> Only the successful transfer of the underlying asset [money]
> does so.
>
> The perspective that an increase in money and/or money
> substitutes will cause, or is needed to cause, an increase in AD
> is just one of the many false conclusions drawn from the
> perception of this false definition of money.
>
> I have presented this query to many and still have not received
> a rational answer, undoubtedly because of cognizant dissonance
> and the fact it is a tautological certainty.
>
> That is -- place a rational set of dimensions on any form of the
> AD or AS plots you want and the ultimate truth is that because
> the dimension of AD and AS can only be an aggregate of the total
> demand and or supply dimensioned by prices or a derivative of
> those prices the relationship of a dollar's worth of aggregate
> for a dollar, or whatever derivative of this relationship you
> use to obfuscate that simple but certain truth, will forever
> remain true.
>
> Perhaps you would like to identify rational dimensions for any
> of the assorted AD/AS plots you use to identify the relationship
> of aggregate supply and or demand and whatever coordinate you
> choose to believe makes a convincing plot?
>
> For an expanded explanation of the obvious problem of AS/AD
> analysis see _Supply and Demand, Again_ at:
> http://www.geocities.com/CapitolHill/1067/chap13r3.html
>
> > >The only distinction
> > >between individually created credit and bank created credit is
> > >the transferability and redemption conditions of the credits.
> > >TRUE. BUT THIS IS A MAJOR DISTINCTION WITH PROFOUND IMPLICATIONS FOR AD
>
> Not for AD [See above.] but for the quantity of true money that
> is required to maintain the value of the currency. [i.e. -- It's
> an error related to the same one that lead Friedman to propose a
> "solution" that is tautologically impossible given the certainty
> that dQ/dM = 0 while at the same time proclaiming it to be true.
> It is the error of accepting statistical correlations as "proof"
> while at the same time proclaiming the truth that they can not
> distinguish cause from effect from coincidence.]
>
> > >Neither private nor bank credit is money in the sense of being
> > >the stuff used to pay taxes and settle court enforced
> > >obligations.
> > >THIS I DO NOT UNDERSTAND???? WHAT ARE YOU GETTING AT HERE??? I THOUGHT I
> > PAID MY TAXES AND SETTLED MY DEBTS BY SENDING THE GOVERNMENT OR CREDITOR A
> > CHECK, ie BY TRANSFERING MY BANK DEPOSITS?
>
> No, you make these payments by directing your bank to make the
> payments. Read the wording on your check. It says "PAY TO THE
> ORDER OF ______", or some such. The debt is not settled by you
> making the order, it is only settled when the bank makes a
> payment of true money.
>
> <<SNIP>>
>
> --
>                         -- jbod
>
>                 Tax Privilege, Not People
> ___________________________________________________
> Come visit and see a new economic perspective --
>        http://www.geocities.com/CapitolHill/1067
>            Comments/arguments welcome.
> .