On The Private Issue of Money….

Brilliant quotes here from Frederick Soddy via Brett Fiebiger at the Monetary Realism site. No comment necessary from me:

On a historical note here is Frederick Soddy, Wealth, Virtual Wealth, and Debt, George Allen and Unwin, London, 1926, p. 147:

No doubt there are still many people, if not the majority, who will be frankly incredulous that money vastly exceeding in amount the total national money can be, and is created and destroyed by the moneylender with a stroke of the pen. How frequently does one still read in the Press that the banks can only loan their customers spare money! Most people still think of what money once was, “a public instrument owned and controlled by the State.””

Methinks much relevance to Krugmanites (i.e. EM) and to State-centric theories of money.

More from Frederick Soddy, The Role of Money, George Routledge and Sons, London 1934, p. ix-x:

“This book will show what money now is, what it does, and what it should do. From this it will emerge the recognition of what has always been the true rôle of money. The standpoint from which most books on modern money are written has been reversed. In this book it is not treated from the point of view of bankers—as those who create by far the greater proportion of money—but from that of the PUBLIC, who at present have to give up valuable goods and services to the bankers in return for the money that they have so cleverly created and create. This, surely, is what the public really wants to know about money.

It was recognised in Athens and Sparta ten centuries ago before the birth of Christ that one of the most vital prerogatives of the State was the sole right to issue money. How curious that the unique quality of this prerogative is only now being rediscovered. The “money power” which has been able to overshadow ostensibly responsible government, is not the power of the merely ultra-rich, but is nothing more nor less than a new technique designed to create and destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real rôle that money ought to perform therein.”

Page x: “To allow it to become a source of revenues to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”

Remember the context is that the banking community plus orthodox economists were denying that banks can create money (knowing full well the opposite to be true) and at the same getting all “morally outraged” about abandoning gold-convertibility. The era was one were “gold” was hailed as the purest money and bankers were hypocrites for pretending they did not create money.

P51: “The Banker as Ruler.—From that invention dates the modern era of the banker as ruler. The whole world after that was his for the taking. By the work of pure scientist the laws of conservation of matter and energy were established, and the new ways of life created which depended upon the contemptuous denial of primitive and puerile aspirations as perpetual motion and the ability ever really to get something for nothing. The whole marvellous civilisation that has sprung from that physical basis has been handed over, lock, stock, and barrel, to those who could not give and have not given the world as much as a bun without first robbing somebody else of it… The skilled creators of wealth [in industry and agriculture] are now become hewers of wood and drawers of water to the creators of debt, who have been doing in secret what they have condemned in public as unsound and immoral finance and have always refused to allow Governments and nations to do openly and above aboard. This without exaggeration is the most gargantuan farce that history has ever staged.”

Soddy was called a “monetary crank” for describing endogenous money.

Page 62-3: “Genuine and Fictitious Loans.—For a loan, if it is a genuine loan, does not make a deposit, because what the borrower gets the lender gives up, and there is no increase in the quantity of money, but only an alteration in the identity of the individual owners of it. But if the lender gives up nothing at all what the borrower receives is a new issue of money and the quantity is proportionately increased. So elaborately has the real nature of this ridiculous proceeding been surrounded with confusion by some of the cleverest and most skilful advocates the world has ever known, that it is still something of a mystery to ordinary people, who hold their heads and confess they are “unable to understand finance.” It is not intended that they should.”

BTW Irving Fisher stole debt-deflation and the ‘100% Money’ reform from Soddy.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. “So elaborately has the real nature of this ridiculous proceeding been surrounded with confusion by some of the cleverest and most skilful advocates the world has ever known, that it is still something of a mystery to ordinary people, who hold their heads and confess they are “unable to understand finance.” It is not intended that they should.”

    chilling quote. Why is it that MR and only a few other schools of thought seem to be exposing the reality of money as an entirely private construct? It seems like the entire economics profession is caught up in some form of government centric money system. Can everyone out there be so naive to the actual workings of the system?

  2. Cullen – can you list which major economic schools of thought, or economists agree banks create money, and which don’t? MMT and MR are on the same page – is anyone else?

  3. The Positive Money people are fully endogenous (I think) as well as the circuitists. Maybe some other Post-Keynesian strands, but that’s about it as far as I can tell. MMT is actually not purely endogenous. They acknowledge that banks create money, but it’s ultimately a state centric theory. The entire theory is really designed around the centrality of the reserve system and the concept that reserves sit atop some hierarchy of money that all transactions ultimately settle in. I think that’s wrong, obviously.

  4. I believe the other side of the spectrum, i.e. the Austrians, also agree that banks create money, which is why they want to end the Fed.

  5. Cullen,

    Interesting stuff. It is funny it has been published so long ago….

    I still have my question on Greece, though. Why “endogenous” money not only cannot be created in the Greece banking system, but, actually, are being destroyed.
    It does not look like external restrictions (i.e. ECB “control” over Euro) makes any sence, since (as it is partly mentioned in the pieces above), even under gold standard “endogenous” money can be created by banking system in vast quantities.

  6. So, as I peruse this post and a prior one, “Loans Create Deposits”, I have come to have a better a sense of the dynamic nature of money creation. It is interesting to think about the fact that banks are not reserve constrained. Additionally, I believe I have read here somewhere in the past that banks are capital constrained, but this is a specific condition or set of conditions and not a universal one. By that I mean impeded bank capital occurs through the mismanagement of the balance sheet composition, interest rate risk/spread failure, or the quality of assets taken on. Assuming that a bank books only good assets, interest spreads are positive at a level covering overhead at a breakeven or better level and liquidity is readily available through the secondary market (brokered deposits, interbank borrowing etc.) there is really no reason why bank money cannot grow indefinitely and possibly at a very high rate. Simply increasing assets and liabilities simultaneously keeps constant leverage and bank capital ratios and allows for the continued expansion of money without capital restraint. It is therefore obvious to me that in a situation where the banking sector is operating with good financial health that the only limiting factor on money growth is in fact money demand (ultimately productivity/innovation?). This then can be steered by central bank actions influencing interest rates which impact the amount of money demand. Would you say this sounds correct more or less?

  7. True but now answer yourself this one: why people (also MMTers) refuses to admit that we’re resource constrained, that we’re living in a finite world, that the principles of thermodynamics come first of any other pseudo economical principles etc… ?

    About 2000 years ago a great thinker called Lucius Annaeus Seneca wrote about man and his illusions expecially in his later masterpiece “Letters to Lucilius”.

    Then In 1620, in his Novum Organum, Sir Francis Bacon classified the intellectual fallacies of the human kind as idols of the Tribe, the Cave, the Marketplace and the Theater… etc…

    99% of men don’t want to know, they look for illusions, so for smart but dangerous and dishonest people, like banksters or priests or warriors (during different historical cycles) it was an easy job selling their poisons to a mass of credulous.

  8. Yes, but the central bank’s ability to steer interest rates is a weak tool for impacting money demand. When the private sector is deleveraging, loan demand drops even if the rates are near zero. MR and Cullen point out that in order to sustain GDP and employment, the government sector needs to step in and create more NFAs through larger deficits to pick up that slack.

  9. Reserves sit atop in the sense that US dollar is something all other money is denominated in. Also, all other money is a promise to repay US dollars, not some private currency, although of course most debt repayment is via cancellation of two dollar-denominated IOUs (so bank loan is cancelled against the bank’s deposit), not actual transfer of US dollars, which MMT recognizes.

  10. Unit of account is a legal matter. Not a reserve matter.

    And no one wants to settle debts in paper money (except drug dealers!) and they literally can’t settle in reserves since non banks can’t use reserves. Everyone wants to settle in bank money and obtain bank money. I’m not sure why MMT misconstrues the reasons why the reserve system exists (to facilitate interbank use of inside money).

  11. Fantastic post. Best thing I’ve read in a while. Particularly the last part that explains that bank “loans” are not loans in the sense most people understand them to be.

  12. Joe in Accounting: What about through lowering taxes? Is that a viable alternative to deficit spending in your view? I realize they are not exact substitutes for one another, but could either be made to work, or perhaps used to compliment one another?

  13. Here’s a quote from Sumner regarding drug dealers, the Fed and paper money:

    “…the recent US recession was triggered in late 2007 by the Fed’s failure to provide enough $100 bills for tax evaders, drug dealers and foreigners (TDFs)”

    Haha! … a little unfair perhaps, in light of the whole article:


    But still, that caught my eye and made me think he might be completely crazy. ;)

  14. Garbage. Banks don’t create money, they create credit. For that matter, anyone (Cullen Roche, the FED, the US government, etc.) can create credit. And to make good on those credit promises banks need money from e.g. deposits.

  15. Who do you think created those deposits in your bank account? Do you have a legal right to create bank deposits denominated in USD? Of course not. Unless you’ve applied for a bank charter….

  16. More misconceptions …….

    I create (or increase) your deposit when I transfer money (e.g. $100) from my account to your account. That could lift the balance of your account from $0 to $100. But I don’t create credit when I donate the money. I create credit when I lend (!!) you money, those $100, even when I am not or don’t own a bank.

    I was talking about “Everyone can create credit”. I didn’t say “Everyone can create money and deposits”. Even banks don’t create deposits or money. They have to borrow it (e.g. from depositors or issue bonds). The deposits are created by the depositors. I need to apply for a bank charter when I want to HOLD (Not create (!!)) deposits and lend those deposits on a commercial basis.

    And the story above seems to simply elude both the MMT & MR folks.

  17. No, when you lend someone money you have to physically (or electronically) give them money you already have. You can’t just create credit. No one would accept a napkin that says “Mr. Market Note”. So you have to give someone else US $ denominated notes when you lend money. This is nothing like what a bank does. A bank runs a credit check and credits your account with deposits in the form of a loan. This is new purchasing power unlike your personal loan which is a transfer of existing purchasing power.

    And banks don’t borrow money to make loans. Banks make loans and find reserves later. Loans create deposits, not vice versa. Banking is a spread business based on managing a payments system so that assets are less expensive than liabilities. The only reason a bank wants deposits is so it can access cheap liabilities to match their assets. Banks don’t acquire deposits so they can go loan them out. They acquire deposits so they can maximize profitability (their spread) and earn a profit (which increases capital which is their true constraint).

  18. I created credit by lending the bank money (=deposit). I extend a loan to the bank and thereby create a deposit. In other words: “Loans create deposits”.

  19. I agree with a number of things you’re saying. But the main point you’re overlooking is that everyone can create credit/debt(s). And no, I don’t have to be a bank to create credit/debt.

  20. Is there any difference between the money that Mr. Market is lending ‘that already existed’ and money that Mr. Market’s bank would create to lend him.
    The difference between money that we own outright and money that we must pay back is what trips people up.
    I’ve got twenty bucks in my wallet and I borrowed $200k to purchase a house. If you asked me, I’d say I’ve got twenty bucks to my name. The value of the house is offset by the loan.
    I guess my question is, what happens to a loan when it gets paid back to the bank. You can say that debt is money, but debt isn’t debt also anti-money, because ultimately it’s going to be destroyed somehow. (Or not, in the long term, if production and output grow?)

  21. Johnny, the difference is that a Mr. Market loan didn’t create any new money, whereas a bank loan does create new money out of thin air.

    But I agree that when you talk about owning money “outright”, it is indeed confusing. What you are really talking about isn’t “money”. It is equity, or net worth.

  22. Yes, I see that.
    ‘Net worth’ is a tricky concept. My home value is part of my net worth, and so is my stock portfolio, but not in the same sense that the money in my wallet is. The house can lose net worth, as can the stocks, which I accept, but I hate to think of my ‘money’ losing purchasing power. It feels to me that it should be a tangible asset. It’s not just a medium of exchange to most people.
    Also what Mr. Market is hinting at is that if a bank lends money, it should have the capital to back up that loan if it goes bad. What we saw in the financial crisis, is that the banks really are not capitalized — they really are making loans with nothing to back them up. That seems dangerous to me.

  23. No, even a bank can’t create money. Even a bank, like Mr. Market, creates new credit/debt “out of thin air”, not money. Never worked in acconting ?

  24. You should try to think of money as a simple medium of exchange. Don’t overcomplicate it. from there, almost anything can serve as money. A promise, a rock, a piece of paper, etc. It just so happens that the most widely accepted forms of money are protected by laws. So bank deposits and notes are the most widely accepted forms of money. But that doesn’t mean gold or other things aren’t money. It just means their money ness is not as high. The money things with the highest money ness can always meet the definition of providing for a medium of exchange. Bank deposits absolutely meet that definition. Nothing else meets that requirement to the same degree that bank deposits do.

  25. Once I was in a jam and had to pay my Federal taxes on a credit card. The IRS accepted this payment. The “money” that was accepted didn’t have to exist first. Now the bank may have had to borrow reserves to clear the payment eventually… they may have even had to borrow those reserves from the Fed.

    The point is, I couldn’t send the IRS my IOU or your (Mr. Market) IOU and then clear the payment later with reserves. I can’t even get my “hands” on reserves because I don’t have a bank charter!

    That’s an example of the HUGE difference between bank “credit” (which is exactly equivalent to paper and coin money to us private non-banks and to the governemnt — except WAY more common and way more convenient), and IOUs that you or I create.

    EVERYONE accepts this kind of credit as money. The banks clear the payments behind the scenes with reserves, but reserves are a kind of money that private non-banks never see or deal in. We don’t get reserve accounts! The Fed will create the reserves as needed to clear payments!

    In a no-reserve requirement system like Canada, Australia, etc, the reserves are not permanent. Aside from small buffer amounts, the reserve balances of banks cease to exist at the end of each business day. The banks continue to owe each other reserves overnight, but the reserves themselves don’t need to exist. The ONLY permanent money is bank money and cash. If they were to get rid of the cash and go fully electronic, then only bank money would be permanent.

    This works since ALL money is bank created money (or as you call it “credit”). Thus if a bank needs to borrow reserves by the end of the day, they are guaranteed to be able to borrow those reserves from banks having an excess of reserves at the end of the day. The amounted of reserved demanded is exactly matched by the stock of excess reserves. As I understand the system, these loans are performed automatically at the end of each day, and essentially the net amount of reserves left in the banking system is zero once all the reserve creditors are automatically matched with reserve borrowers. If somebody has more information on how this system works I’d love to hear it… I gleaned the above from reading some comments on Nick Rowe’s blog from someone who was informing Nick of the details of how the system works (Nick is a Canadian economist).

    So if you prefer to keep calling it credit, fine… but that’s a pretty pointless distinction.

    Here’s a simple scenario I created to illustrate this no-reserve case:


    Rather than transferring the deposit, you could instead suppose person x had purchased an item from a person y having an account at Bank B. But at the end of the day, no reserves need to exist (the CB’s balance sheet is still clear), yet “permanent” money still exists in the system in the form of bank deposits. Perhaps having a “person y” in the scenario makes this more clear, since person y would NOT owe anything back to bank A: they’d just have $100 of permanent “money” in their deposit.

    To add in reserve requirements (like our system) is not difficult:


    Of course these examples are super simple and I’m ignoring so called “capital requirements” (does
    Canada even adhere to the Basel Accords? Again I don’t know… I seem to recall Nick writing once that they do not).

    So to me this is a clear case of “it walks like a duck, it flies like a duck, it swims like a duck… it’s a duck!” … regardless if you insist on calling it “credit” or not does not change the fact that this credit IS money to its users!

  26. Yes, you see a lot of mutual admiration between someone like Mish Shedlock (Austrian) and Steve Keen (post-Keynesian-ish) and agreement on the description of the system we have now. Only Shedlock thinks the system we have now is broken and that banks shouldn’t be allowed to create money. Still Shedlock seems to understand the system we have a lot better than some of his fellow Austrians (e.g. Peter Schiff) whom he’s called out on at least one occasion as being off base on his endless hyper-inflation predictions.

  27. Tom, what happens if you didn’t pay your credit card bill that time?
    Wouldn’t the IRS be coming after you for payment?
    Point being, maybe extending credit doesn’t make it ‘money’ until the bill is paid.

  28. The money is “paid”. The IRS gets their funds. It’s the bank who will default on you if you don’t settle with them. That’s what banks do. They run a payments system and you must settle through their system. When you take a loan out to buy a home or pay your taxes the person you’re actually transacting with gets their funds. In this case, the IRS gets paid via credit card and the bank settles funds with the IRS. Ie, that payment is processed. The bank has made a loan on your behalf for the amount of the tax payment. You must then deliver funds (and interest) to the bank. If you buy a house your bank will pay the seller on your behalf by making a loan (which creates a deposit). You must then be able to deliver funds to repay the bank.

    It’s really better to think of money as a medium of exchange and not to confuse what’s going on here too much. Credit is money because it absolutely serves as a medium of exchange.

  29. All true, but using the credit card didn’t create any new money.
    The bank just agrees to give the IRS money until I give them my money. If I default, the bank is stuck.

    Note: I do understand that loans create money, I just don’t see it in this instance.

  30. Johnny: What he (Cullen) said. ;)

    BTW, I don’t intend to confuse people here. For me I have to see the details of how the reserves flow behind the scenes to believe it, but Cullen is probably correct about keeping it simple and thinking of credit as a (legally recognized) medium of exchange.

    Also I should note that in my comments above I’m assuming no-reserve-requirement countries don’t do QE. I believe that the UK is an exception (they do QE and don’t have reserve requirements). But this isn’t really important for Cullen’s points… it just throws some of my statements into dispute regarding “no overnight reserves in the system” … a point I made to highlight the idea that bank deposits are really the most important form of money the real economy uses. Somehow I thought that might be Mr. Market’s argument: that somehow he was assuming there’s some other kind of money in the system which is the important kind… when really there’s not.

    Also, on a slightly different subject, you might ask “Well if ALL money is credit, where do the interest payments come from?” But keep in mind that banks must spend money too: on goods, services, salaries, taxes, and dividends. Thus those interest payments get recycled into the real economy. But it does seem to imply that if banks were to start hording interest payment profits in the form of reserves (even if these “hoards” of reserves were always loaned out to other banks) that the total dollar amount of outstanding loans must continue to expand to offset this hoarding… otherwise it seems like some loans will start being defaulted on. Not sure about that last point! Just a little thought experiment. In other words, assume there’s just one commercial bank… if the interest coming in exceeds all bank expenditures (but the overall dollar amount of loans remains constant)… eventually the bank will foreclose on everyone and take all their stuff. Ha!

  31. Johnny, I don’ know about you, but I like to visualize very simple closed system examples. Assume that tax payment was spent by the government, and I worked for a company that did business with government contractors… then if I’m able to recapture enough of that payment (that I initiated with my tax payment) each month, I can continue to make my minimum payment on the card… and let the balance ride indefinitely.

    I wrote a much longer comment (which hasn’t appeared yet), at the end of which I do a little thought experiment along these lines… but that’s basically my point. Also assume the bank must pay dividends, salaries, etc.. so if its outflow is equal to it’s inflow … and perhaps I can capture a bit of that business (directly or indirectly) that can also help w/ my minimum payments. Of course the total amount of loaned funds (money) in the system may be increasing as well, which would also improve my chances avoiding default!

  32. Tom, not sure why some of those longer comments get caught in spam, but I always clear them. Just an FYI. I appreciate your contributions so just wanted to give you a heads up.

  33. So my point here is that the money I eventually give the bank (which may just go to interest… pretty much indefinitely), was just money somebody else borrowed in much the same way, or money that the bank spent (which in turn came from some other loan), or some of my borrowed money coming back from the gov, etc.

    If we could start a system off like this (with a single loan, on which interest is paid each year but no principal), then you could trace ALL money in the system to that one loan event. In reality, there are many loan events… and principal does get paid back, and new loans created… it all gets a little intractable… like trying to keep track of each water molecule as it goes from ocean to rain cloud to snow pack to river, etc.