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The Forum > Article Comments > A licence to print money: bank profits in Australia > Comments

A licence to print money: bank profits in Australia : Comments

By David Richardson, published 15/3/2010

Banking is an essential part of the Australian economy - almost an essential service. So why should it be 'extremely profitable'?

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Pericles
By money substitutes I mean any token standing for money but not backed by money in specie. So for example, in a fractional reserve system, where the reserve requirement is 8%, the 92% are money substitutes.

So if money and money substitutes perform the same function, then being in favour of a licence to print money substitutes, is economically the same thing as being in favour of a licence to print money?

Fickle
The idea that we should try it in practice and see what happens depends on the assumption that the underlying theory about interest is correct: that we can dispense with interest on loans of money substitutes. It also depends on the assumption - correct me if I'm wrong, that the original problem we are trying to remedy is money that 'represents credit for new assets or value for trading purposes', and that we should fix the problem by passing a law making it illegal for the lenders to receive interest on loans of such money substitutes. But if the original problem is the creation of money substitutes unbacked by money in specie, then surely the root of the problem is the creation of money substitutes unbacked by money in specie, rather than interest thereon? If the interest can't be justified, what is the justification for the money substitute on which it is based?

Arjay
If the original problem is the amount of inflation created by the fractional reserve system, and the fractional reserve system is in effect made compulsory for the whole population by the governmental granting of licences to print money substitutes, then there's no need to put a tax on fractional reserve-generated inflation: all that’s necessary is to stop doing what’s causing the problem in the first place: granting licences to print money substitutes.
Posted by Peter Hume, Friday, 19 March 2010 9:33:42 AM
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I'm not sure you are right, Fickle Pickle.

>>We can talk about this until blue in the face and we will be none the wiser<<

The discipline of writing down ideas as part of testing their resilience is actually a very important one. You will be able to see any flaws or gaps far more clearly.

Because the devil is, as always, in the detail. Not in the concept, which can be as bright-and-shiny as you like. It's the detail that determines – always and forever – whether a scheme/business/enterprise will work

You mention Chris Cook's peer-to-peer credit.

Lovely theory.

But closer examination shows it slightly less bright-and-shiny.

“Let's consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.”

http://www.policyinnovations.org/ideas/innovations/data/000085

The essential ingredients are: “a neutral custodian”, “agreed upon affordable rental”, “investors” and “management consortium”.

These are each brand-new entities that need to be created for this system to function.

But each of these already exists in our present environment.

Banks are neutral custodians. The market sets a price. Investors exist, where there is income to be earned. And there is a wealth of property companies around the place to do the job of a management consortium.

Inventing an entirely new system might look good on the whiteboard, but each element needs to operate better than the existing processes for it to be anything more than a two-dimensional idea.

It occurs to me looking through the others you mention, that they are all attempting the same thing as Chris Cook. To replace one form of financial exchange medium with another. They each seem fixated on the need for “something different”, without making it clear why money itself, rather than how we use it, is the problem.

But I still may be missing something?
Posted by Pericles, Friday, 19 March 2010 9:47:03 AM
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Peter,

Money is a measure of value. It can also be a store of value. When it is a store of value it attracts interest. When it is used as a measure it should not attract interest.

There are no laws that need to be passed. These are agreements we make between participating parties and there is plenty of contract law to cover what is needed.

We use money to compare things. So we say that this basket of goods is of value X and then we say that this different basket of goods is also of value X and so we agree to swap the two baskets.

There is NO justification for charging interest on the money used to facilitate this exchange - but that is what we do. There is no need to charge interest on the money used for trading.

The more difficult one to understand is money to create new assets. We can create money to build a new asset and get the asset to repay the money. Before the asset is built it has zero value so there is no justification to charge interest on the money that it represents - and in fact we don't. When you invest in shares you do not expect interest plus dividends yet that is what is asked when we invest in building new assets.

This is why we get so little investment in new assets and so much churn of people buying old assets.

The existing system of money creation favours buying old assets over building new ones. I am proposing that we favour building new assets over old assets by changing the way we create money for new asset investment and we start with new assets that are public infrastructure assets.

Again there is no need for any new laws. We can do it with existing contract law.
Posted by Fickle Pickle, Friday, 19 March 2010 9:59:40 AM
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This is the most constructive, least acrimonious discussion that I've encountered on OLO - thank you. However it is struggling because of poorly-defined terms and some unclear concepts.

Can I suggest adjourning to a web site that Fickle and I set up last year, but which I haven’t used much. The following link is to a basic discussion of money as a medium of exchange, with terms clearly defined.
http://stableproductivemoney.wordpress.com/2009/03/18/properties-of-token-money/
Perhaps you could have posting privileges if you want to put your ideas into a short essay – and Fickle agreed.

Most of our money is token money, having little or no intrinsic value. Effectively, neither is it backed by a commodity. A key point is that unbacked token money is implicitly a contract between the issuer and society (I undertake to return real value to the market, to redeem the value-less token I just issued). In effect, token money is backed by a society’s mutual trust.

Another key point is that charging interest on loans entangles the money supply with the investment process. This, it seems to me, is the underlying reason why a problem on Wall Street has such a dire effect on Main Street. In essence, if investments fail the money supply shrinks, and that chokes off legitimate commerce.

I think the solution is to stop supplying new money as “loans”, and to supply it as a service, with appropriate fees. This has been done in various ways at various times, but has never become general. Essentially it can work like a line of credit or a credit/debit card

Investment of existing wealth can proceed as usual, with investors gaining a return, either in the form of dividends or as interest. (There is a separate problem with charging interest, which is that the lender does not take on any risk. This is a market failure, because proper pricing requires that risk is accounted for. It is also a moral failure.)

If the money supply is independent of investment, then the failure of investments will affect only those directly involved, instead of dragging everyone into a recession.
Posted by Geoff Davies, Friday, 19 March 2010 10:28:45 AM
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And my last post crossed with Pericles' and Fickle's.

Fickle, I don't think money is a store of value. It can be a measure of stored value, but the value is usually stored as an investment in a thing (diamonds under the matress) or an enterprise. Fundamentally money is, or should be, a medium of exchange. As part of that function it measures relative values. Prices are only established during exchange (which is why the biosphere has no definable monetary value, because there's nothing to exchange it with).

Fickle I also have reservations about using new money to invest in new assets, because that makes the money supply vulnerable to the failure of the investment. It could be done in carefully restricted circumstances (with which you probably agree) and with, in effect, insurance against failure. Such things are done, and grossly abused, on Wall Street, but stricter regulation should limit the abuse.

Pericles, I'm not sure I got your point. Do you mean we should not trial new ideas? Or just that we should thoroughly debate them first? I would certainly agree with that, and also with Fickle, because only a real-world test will turn up all the connections and unexpected consequences the idea might involve.
Posted by Geoff Davies, Friday, 19 March 2010 10:43:59 AM
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No Pericles, you are on the money [excuse the pun]. In fact the movement instruments you indicate, and as reinvention, you extrapolate, may be observed consideration of the same elements underpinning realisation of the event of the GFC.

The fixation you identify is exactly that I refer to in my previous posts of myopic syndrome attending such consideration. The instrument required for such resolution, is the science of management, however economists, synonomous with current observation of IT practitioners, ostensibly believe that as they are at the cutting edge of progress, they are too clever to retain such need for fundamentals of a known science [self adulation]. Therefore they consider such requirement beneath them [arrogance].

That is required is application of fundamental principles of management, currently the most obvious of which is balanced regulation and distribution of wealth, and associated with the core principle of consolidation of resources relevant to development of renewable energy sources. These achievements will drive economic resurgence in the west according to the readily observed current macro economic settings and position. It is the focus which is required to be attended.

Fundamental scientific principles are differentiated from generalised ‘mission statements,’ or notions or initiatives of interest, as they are proven. Therefore, if practitioners are not able to apply themselves to such critical analysis, they are simply observed not competent.
Posted by Ngarmada, Friday, 19 March 2010 10:50:26 AM
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