[dms]

That Forbes article is great. And I think I now understand the issue you guys had with the phase “from thin air”. Ironically I think yanis varoufakis says it best with his “borrowing from future profits” considering he was the one that says “out of thin air” the most. 

[dms]

ALB wrote:

dms wrote:

is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html

 Absolutely, but they didn't end there with a full stop, did they? It is a colon because it's misleading if they left the sentance as you left it. They went on a bit longer than that : 

ECB wrote:

is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero.

They qualified after the colon "backed by private credit" to mean that the money they create is backed by the liability on the debtor to pay it back. That they're able to do it as it's temporary.  They then go on : 

ECB wrote:

  So, it is one form of currency that is created

[dms]

ALB wrote:

Yes, if you define bank loans as money

I think everyone is. Perhaps this is the key point? I take a loan out from a bank (otherwise known as "borrowing money") and can use it to buy good and services, pay taxes, whatever without ever withdrawing it as cash.

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then in making a loan a bank is ceating money (by definition). If they extra loans over and above those being repaid then they expand the "money supply" (by definition).

 Well then we agree? With me, Varoufakis, Wikipedia  and the encyclopedia britannica. 

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But the question remains: where does the money to make the loans, and the extra loans, come from? Is it simply conjured up out of thin air or is it money that the banks have borrowed from depositors, other banks and financial institutions, and/or the central bank? 

It's partly conjured up out of thin air, and partly money that the banks have borrowed from depositors, other banks and financial institutions. They do this because they have to meet their reserve requirement. 

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I don't think Zeitgeist is a reliable source of information on how banks work. Maybe they have learnt something in the meantime, but at the beginning they were out-and-out thin-airists. See:http://www.worldsocialism.org/spgb/socialist-standard/2000s/2009/no-1253-january-2009/banks-money-and-thin-air

I was just making the point that the Britannica makes the same point as Zeitgeist. Look, I'm more than happy to be wrong and I've been looking around for any sources that back up what you're saying, I just haven't found any and youv'e not offered any. All I've seen is newspaper clipping proving that banks borrow from other banks, which was never in dispute.

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ALB wrote:

 The issue is what is the nature of banking and banks, and can banks create credit or money out of thin air. The answer is that banks are financial intermediaries borrowing money at one rate of interest and lending it at a higher rate, the difference being their income out of which they must pay their workers and covers their expenses, what's left being their profits. They are not conjuring money out of thin air and  making a profit out of lending it. If they could, they be getting a higher rate of profit than the rest of capitalist business, but they don't. Ok, they are now linked together with the central bank in a single monetary system (Keen's point) but that doesn't make any essential difference to what commercial banks are and can (and cannot) do.

If commercial banks can’t create money then they can’t increase the money supply, and I can’t seem to find a single article that supports that. Even the Encylopedia Brittannica says that they can https://www.britannica.com/topic/commercial-bank , indeed they use the Zeitgeist Movement point that the loan from one bank can boost the reserves of another so you get that multiplier effect. I think what’s confusing everything is that you make it sound like they borrow the whole amount that they lend out, and that’s not the case as I understand it. They only borrow what they need to meet the reserve requirements  

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DJP wrote:

I don't think anyone argues against this, so long as you're talking about the broad money supply, or if they do I've not heard it.The question is whether or not commercial banks can infinitely go on extending credit without eventually getting into trouble.

Not even Positive Money argue that  

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Or another question concerns the questions of the nature of economic crises in capitalism. Is the cause of these always and only to do with the money supply?

ive been listening to Yanis Varoufakis’ new book “Talking to my daughter about the economy” and he too describes money creation by commercial banks as “out of thin air”. A number of times, actually (maybe he’d be a better person to debate?) and he talks at length about how commercial banks collapse despite this. If anyone has the book and can help me out with the specific passage that’d be great. As I say, it’s an audio book so it’s tough. 

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I have vague memories of watching the Positive Money videos some years ago and I’m sure they mentioned that banks would borrow from other banks in order to maintain the minimum amount they are required to hold by law. For example, if after all the transactions from the day have been cleared, the new money created from loans, and the money destroyed by people making repayments, if they don’t meet the 10% reserve requirement (or whatever) they’d be forced to borrow from other banks. Even the Wikipedia article (https://en.wikipedia.org/wiki/Money_creation ) says :“Because of this money creation process by the commercial banks, the money supply of a country is usually a multiple larger than the money issued by the central bank” I dont think these newspaper articles with quotes talking about banks having to borrow from other banks disprove anything. No one disputes that. The banks borrow in order to meet their reserve requirements. The question is whether the money supply is expanded and contracted by private businesses/individuals  taking out and repaying loans from commercial banks. It sounds to me like it is and I think the ECB article backs me up on this. 

[dms]

well let’s go with a central banks definition of money shall we?

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ALB wrote:

Someone should indeed tell the ECB !

European Central Bank wrote:

Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. (….). Inside money (….) is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html

The whole ECB document is a good description how the modern monetary system works. In fact it is something we can, and should, quote (and quote again) against the "thin air" school of banking. "Private credit" of course includes outside deposits (i.e not those opened by a bank for those it makes a loan to, but people and organisations depositing their own money there) and what banks themselves borrow.I think I'll put it to Steve Keen since he claims the backing of German banks for his description of how the monetary system works (and since he teaches just down the road from me at Kingston University). Not that he's a "thin-airist". It''s just that his description is an open invitation for them to misinterpret him..

if that were true why would they say “create inside money”? Why not just say that they borrow money from other banks in order to lend it out? Why even include it in a section called “how is money created?” at all?the only way it makes sense is if they create it at the moment the loan is made. They say it’s backed by “Private Credit” because they are saying it’s only temporary. It will (hopefully) be paid back. 

[dms]

Someone should tell the ECB ;

Quote:

Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. The difference between outside and inside money is that the former is an asset for the economy as a whole, but it is nobody’s liability. Inside money, on the other hand, is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero. So, it is one form of currency that is created – and can be reversed – within the private economy.

 https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html

[dms]

It's interesting what happens when you check sources. On http://positivemoney.org/how-money-works/proof-that-banks-create-money/ they have a very damning looking quote which says : 

Quote:

“Where does money come from?  In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.”

 But when you click on the source and go to the BoE website there's a crucial bit missing between the last two sentences : 

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. As ‘Money creation in the modern economy’ explains, though, banks cannot create money in this way without limit: how much banks lend will rest on the profitable lending opportunities available to them which will, crucially, depend on the interest rate set by the Bank of England.  In this way, monetary policy acts as the ultimate limit on money creation. 

 I think I'm just going to have to read the document that got PM started in the first place – http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf . I've a feeling everything will be answered in there.

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DJP wrote:

If loans are made out of nothing then there would be no restriction on when they could be issued.

I guess the restriction is whether or not the borrower has the ability to repay. Under the PM model of banking the bank only has to ensure their assets (the loan agreements) match their liabilities (deposits in accounts). If they start issuing dodgy loans to people and they get defaulted on then they are at risk at not being able to cover people wanting to withdraw their money.

[dms]

Thanks ALB for the detailed answer. I think where you and Positive Money part company is they say the debt itself is an asset and does not need to be matched with a deposit or through borrowing money unless the lender defaults. For example,  in their description of the banking crisis they say the banks only ran into trouble when it became clear loans would not be repayed. This meant they had a deficit on their balance sheet which had to be matched through borrowing money which they werenot able to do.As I understand your argument, you're saying the bank has to ensure it has the money to cover a loan the moment it leaves the bank. That's where the difference is, I think.

[dms]

OK, so if I'm understanding this correctly, Positive Money is misleading because any money "created out of thin air" needs to be accounted for the moment it leaves the bank. I.e. I may be able to borrow £100 but the moment I withdraw it in cash the bank needs to be able to account for that money on its books, either through deposits or through its own borrowing. Is that right?In other words it's no different to my using a charge card. In a sense I created that "out of thin air" whenever I use it but I have to make sure that the money is there when the bill is due, either by borrowing or through wages.

[dms]

Really enjoyed this. Thanks for uploading!

[dms]

Great, thanks Alan

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