This article continues the plan outlined in the previous article “Central Banks as Banks.” As I described therein, this is projected to become a chapter within my banking primer.
It’s hard to know what to make of this ramble. First, CB’s have nothing to do with whether a currency is pegged or not. It’s elementary to understand there is no real benefit to restricting the money supply by the amount of something you dig out of the ground. Why would anyone do that?
Then there’s the payments system vs the credit system. In the US, pre FED, banks issued their own money but it didn’t trade at par and if there was no ‘lender of last resort’ there was no protection against runs on a bank. Guaranteeing deposits essentially aligned banking, rigidly, to the USD.
The payments system is essentially communal - every citizen needs a bank account. In fact, many are denied this privilege, hence an opportunity for citizen accounts at a CB or a public sector bank.
On the credit side, banks create money, although, as above, as agents of the state. Does it have to be as agents of the state? No, but then you’re back to money not moving fluidly through the economy. And, at the end of the day, the state will always dominate. The US war of independence was fought with state-issued paper money and the Civil War with Greenbacks. The only alternative to state domination is civil war. And, bear in mind, there is a vast state-contrived legal system supporting payments, without which the economy could not function. The fantasy of a no-government economy seems to me to be entirely infantile.
So there you have the tension. You need state control for times of emergency but private creation of money otherwise. The Bank of England was established, I believe, in 1692, as a way to finance private trade (East India Co, etc) and supplanted a system in which the crown controlled the money supply - mostly ‘worthless’ tokens of hazel wood tally sticks. The purpose of a CB must then be to regulate and control the creation of money but CBs in the west and the FED in particular have done an appalling job. They have allowed our economies to become de-industrialized and financialized for speculation. The result is immiserating inequality.
Finally, Steve Keen has convincingly demonstrated that far from stabilizing the economy, rampant credit creation by private-sector banks is the genesis of financial instability through the Minsky Instability Hypothesis. The caveat is that government debt, which economists obsess about is more or less irrelevant while private (credit) debt is the root of all evil and is entirely ignored by CBs.
You have to pick your way through whether and on what terms we should keep CBs. But when balance sheets are explained, it should become very obvious that CBs and government Treasuries can be merged at the stoke of a pen.
"First, CB’s have nothing to do with whether a currency is pegged or not." The decision to peg is by the national government. But if the government chooses to do so, the central bank has no choice but to operate consistent with that peg. Whether or not you think pegs are a good idea, the reality is that currency pegs existed both historically and in some countries at present, and we need to discuss how that affects the central bank. A primer that ignores currencies with pegs has obvious defects when a considerable amount of confusion results from applying currency peg logic to a non-pegged currency.
As for the rest of your points, I scanned them, and I did not see much resemblance to my topic of discussion. I was discussing the fundamental connection structure of banking transactions, and why we end up needing a central banking in practice. You are addressing a set of controversies that are outside the scope of this article.
Might be worth adding just for understanding? That deposit-holders' accounts at banks are "for benefit of" (FBO) accounts? So while the depositor/bank relationship can be viewed as a credit relationship, deposit bank can also be viewed as just a service provider who owes duty of providing competent services to depositors. FWIW...
(Probably not useful to view banks'/CBs' relationship re: "reserve" accounts in that light. More like a franchise/franchisee relationship.)
This is like saying "Inflation IS a tax." No, it's not. Can be usefully characterized, understood in that light (though in a very narrow and quite stylized way).
Neither depositors nor banks enter into a loan agreement. Banks do find it useful to view deposits as "loans" "funding" lending, but when a person or firm deposits their paycheck or revenues, they sure don't see it as "lending" to the bank.
Understanding the nature of their FBO agreement does helpfully clarify and expand understanding IMO.
This IS-ism is widespread and IMO harmful in econ discussions. Depends on what your definition of "is" is...
People may not read them, but there is a document somewhere describing the legal obligations associated with the agreement for the depositor to lend money to the bank via a deposit. That is the credit relationship, not all credit relationships are classified as “loans.”
If not covered by deposit insurance, the deposit is paid back during a restructuring exercise - exactly like any other credit arrangement. This would not make sense if it were not a credit relationship, which is why your comment makes the situation less clear, not more clear.
Arguing that people don’t think of the deposits as loans is an example of the misunderstandings of banking that my book will be targeting. It’s classic mischaracterisation of banking that internet Austrians obsess over.
I wouldn't dream of saying that it's invalid to describe that as a credit relationship, which is what you seem to think I'm saying. I would say it's not the only useful way to describe the relationship.
Do you think describing it as a service-provider FBO relationship/account is ipso facto invalid/useless, because there are other valid ways to describe it?
I observed that people do not want to own the money and have intermediaries enter into a safekeeping relationship (like a safety deposit box), they want to eliminate the burden of validating that the money assets meet accepted standards. Instead, they make a deposit and then it is the intermediary’s job to ensure the validity of the money. Since the client no longer owns the money, they have a credit relationship with the intermediary. What other relationships that arrangement implies is superfluous to the critical issue that the client no longer owns the original monetary asset.
This is not an academic point. One of the big Austrian memes is that fractional reserve banking is fraudulent, based upon the incorrect theory that banks have a safekeeping relationship, and not a credit relationship. Your comment does not help understanding in that critical debate.
It’s hard to know what to make of this ramble. First, CB’s have nothing to do with whether a currency is pegged or not. It’s elementary to understand there is no real benefit to restricting the money supply by the amount of something you dig out of the ground. Why would anyone do that?
Then there’s the payments system vs the credit system. In the US, pre FED, banks issued their own money but it didn’t trade at par and if there was no ‘lender of last resort’ there was no protection against runs on a bank. Guaranteeing deposits essentially aligned banking, rigidly, to the USD.
The payments system is essentially communal - every citizen needs a bank account. In fact, many are denied this privilege, hence an opportunity for citizen accounts at a CB or a public sector bank.
On the credit side, banks create money, although, as above, as agents of the state. Does it have to be as agents of the state? No, but then you’re back to money not moving fluidly through the economy. And, at the end of the day, the state will always dominate. The US war of independence was fought with state-issued paper money and the Civil War with Greenbacks. The only alternative to state domination is civil war. And, bear in mind, there is a vast state-contrived legal system supporting payments, without which the economy could not function. The fantasy of a no-government economy seems to me to be entirely infantile.
So there you have the tension. You need state control for times of emergency but private creation of money otherwise. The Bank of England was established, I believe, in 1692, as a way to finance private trade (East India Co, etc) and supplanted a system in which the crown controlled the money supply - mostly ‘worthless’ tokens of hazel wood tally sticks. The purpose of a CB must then be to regulate and control the creation of money but CBs in the west and the FED in particular have done an appalling job. They have allowed our economies to become de-industrialized and financialized for speculation. The result is immiserating inequality.
Finally, Steve Keen has convincingly demonstrated that far from stabilizing the economy, rampant credit creation by private-sector banks is the genesis of financial instability through the Minsky Instability Hypothesis. The caveat is that government debt, which economists obsess about is more or less irrelevant while private (credit) debt is the root of all evil and is entirely ignored by CBs.
You have to pick your way through whether and on what terms we should keep CBs. But when balance sheets are explained, it should become very obvious that CBs and government Treasuries can be merged at the stoke of a pen.
I have been busy, and just saw this.
"First, CB’s have nothing to do with whether a currency is pegged or not." The decision to peg is by the national government. But if the government chooses to do so, the central bank has no choice but to operate consistent with that peg. Whether or not you think pegs are a good idea, the reality is that currency pegs existed both historically and in some countries at present, and we need to discuss how that affects the central bank. A primer that ignores currencies with pegs has obvious defects when a considerable amount of confusion results from applying currency peg logic to a non-pegged currency.
As for the rest of your points, I scanned them, and I did not see much resemblance to my topic of discussion. I was discussing the fundamental connection structure of banking transactions, and why we end up needing a central banking in practice. You are addressing a set of controversies that are outside the scope of this article.
Might be worth adding just for understanding? That deposit-holders' accounts at banks are "for benefit of" (FBO) accounts? So while the depositor/bank relationship can be viewed as a credit relationship, deposit bank can also be viewed as just a service provider who owes duty of providing competent services to depositors. FWIW...
(Probably not useful to view banks'/CBs' relationship re: "reserve" accounts in that light. More like a franchise/franchisee relationship.)
People might not want it to be a credit relationship, but it is. I do not see how saying it is not is going to clarify things.
This is like saying "Inflation IS a tax." No, it's not. Can be usefully characterized, understood in that light (though in a very narrow and quite stylized way).
Neither depositors nor banks enter into a loan agreement. Banks do find it useful to view deposits as "loans" "funding" lending, but when a person or firm deposits their paycheck or revenues, they sure don't see it as "lending" to the bank.
Understanding the nature of their FBO agreement does helpfully clarify and expand understanding IMO.
This IS-ism is widespread and IMO harmful in econ discussions. Depends on what your definition of "is" is...
People may not read them, but there is a document somewhere describing the legal obligations associated with the agreement for the depositor to lend money to the bank via a deposit. That is the credit relationship, not all credit relationships are classified as “loans.”
If not covered by deposit insurance, the deposit is paid back during a restructuring exercise - exactly like any other credit arrangement. This would not make sense if it were not a credit relationship, which is why your comment makes the situation less clear, not more clear.
Arguing that people don’t think of the deposits as loans is an example of the misunderstandings of banking that my book will be targeting. It’s classic mischaracterisation of banking that internet Austrians obsess over.
I wouldn't dream of saying that it's invalid to describe that as a credit relationship, which is what you seem to think I'm saying. I would say it's not the only useful way to describe the relationship.
Do you think describing it as a service-provider FBO relationship/account is ipso facto invalid/useless, because there are other valid ways to describe it?
I observed that people do not want to own the money and have intermediaries enter into a safekeeping relationship (like a safety deposit box), they want to eliminate the burden of validating that the money assets meet accepted standards. Instead, they make a deposit and then it is the intermediary’s job to ensure the validity of the money. Since the client no longer owns the money, they have a credit relationship with the intermediary. What other relationships that arrangement implies is superfluous to the critical issue that the client no longer owns the original monetary asset.
This is not an academic point. One of the big Austrian memes is that fractional reserve banking is fraudulent, based upon the incorrect theory that banks have a safekeeping relationship, and not a credit relationship. Your comment does not help understanding in that critical debate.