Saturday, March 2, 2013

The Positive Money system – in Plain English

This proposal for reform of the banking system explains, in plain English, how we can prevent commercial banks from being able to create money, and move this power to create money into the hands of a transparent and accountable body.
It is based on the proposals outlined in Modernising Money (2013) by Andrew Jackson and Ben Dyson, which in turn builds on the work of Irving Fisher in the 1930s, James Robertson and Joseph Huber in Creating New Money (2000), and a submission made to the Independent Commission on Banking by Positive Money, New Economics Foundation and Professor Richard Werner (2010).
Positive Money
The Positive Money system – in Plain English

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See also How can we escape from our current dysfunctional money system?

These folks are pushing this hard.

79 comments:

David said...

It's interesting. With Dyson, Jackson and Werner, you have three young talented guys with considerable experience in economics and the financial sector. They also seem to have a fair amount of charisma and media savvy. Contrast that with Zarlenga and his group who are mostly older guys who read off notes during their conference presentations.

It seems that if something is to come to fruition with this approach to monetary reform, it will happen in the UK a lot sooner than the US.

Matt Franko said...

From their web page:

"The gap between the money coming in (tax revenue) and the money going out (expenditure) – rocketed from £30bn right up to £180bn. This gap is the ‘deficit’, and had to be covered by borrowing money.


All the money that we borrow to cover the deficit gets added to the ‘national’ (i.e. government) debt (the total amount of money the government owes). The national debt is soaring right now:

Our government owes an astronomically large amount of money. Each year we have to pay taxes to cover the yearly interest on this national debt.

This interest costs each adult around £700 in taxes each year. That interest cost is money that can’t be spent on public services. In total, it’s close to the total amount that we spend on education. It’s taxes that we have to pay without getting anything in return. And that figure is rising all the time...."

this could have been written by one of Peterson's morons.... ie "govt gets the money from taxes blah, blah...."

Sorry, they are stupid and blind too ... no view at all of our govt's fiscal authority...

rsp

Ralph Musgrave said...

I support Positive Money both financially and with my time, plus I’ve written several blog posts for them. They are spot on in some respects, but I agree with Matt that they haven’t got a good grasp of deficits and national debts.

Their best published work is their submission to the Independent Commission on Banking (mentioned above) which was co-authored by Prof. Richard Werner. I suspect Werner ruled out some of mistakes that PM might otherwise have made.

Positive Money works on a shoe string: their turnover last year was £40,000 I think. In view of the garbage we get from the IMF and various central banks which can afford to hire dozens or hundreds of economics PhDs, it strikes me Positive Money are doing brilliantly.

Simon Thorpe said...

Sorry. Maybe I'm thick. But I find Positive Money's case - and in particular, Jackson and Dyson's book "Modernising Money", extremely convincing. I realize that the strange US system with the Federal Reserve may not map directly onto the UK system. But at least for the UK, which they analyse in detail, the proposal of removing the ability of commercial banks to increase and decrease the money supply at will, and give responsibility for regulating the money supply to an independent but democratically accountable "Money Creation Committee" makes very good sense indeed. It would be a complete revolution compared with the current system, in which the UK banks have increased the Money supply (measured by M4) by about 10% per year since 1983. Even if you allow for inflation, this still means increasing the money supply by 7% a year. And the total net cost of interest payments across the economy adds up to £2.4 trillion since 1987. That is all money that has gone to the banking system, but could have avoided if the same money creation had been done sensibly by the central bank and interest free.

Jackson and Dyson discuss four different ways for spending central bank money into the economy - increased public spending, reducing taxes, handouts to citizens, and paying off public debt. They don't specify which should be done - but they demonstrate absolutely convincingly that the current system in which new credit (i.e. debt) is almost entirely under the control of private banks cannot be defended.

andy blatchford said...

Hi Simon
Nice to see you here, havent commented on your blog for a while.
MMT looks at public debt/deficits quite differently as I explained at yours some time ago. (AndyCFC)

Simon Thorpe said...

Hi Andy....

OK, I know that there are some MMT people who think that Positive Money' proposal can't work. But I can't see where the problem is.

Have you read Modernising Money? Can you tell me where they go wrong?

It's really sad that monetary reformers seem to be incapable on agreeing on a clear implementable scheme. Until there is agreement, the current madness will keep going on - and everyone (except the bankers) is suffering.

Dan Kervick said...

My concern about Positive Money is that what they advocate is essentially a monetarist diagnosis of what is wrong in the present system. They focus far too much on the "money supply". The ability of banks to expand balance sheets and create more money-like liabilities in the economy is a source of both economic dynamism and and potential economic instability. Whether we should have a more conservative and restrained system based on 100% reserves, etc. is worth considering.

But what they are missing is that financial stability is not simply a function of the money supply. There are all kinds of other debts and complex financial instruments in a modern, financially sophisticated economy. All of these instruments are potential sources for flexibility and efficiency, but also potential sources of instability and over-leveraging.

The fundamental source of financial instability is the ability of economic agents to make promises for the delivery of something, often money but not always money, that they do not currently have in their possession. (And of course if they did have it in their possession, they would make many fewer promises and more on the spot payments.) We live in a vast modern financialized system based on these promises, on credit and debt. There are derivatives, pensions, stocks, bonds, etc. You can do what you want about the mechanisms for expanding money. But that does nothing about the broader question of the potential complexification of debts into speculative, and even ponzi structures. In fact, one could argue that it is the ability of banking system, backstopped by government guarantees to expand money liabilities in response to the expansion of other liabilities that keeps the system from failing even more often.

The idea that you can keep a handle on debt and financial stability by controlling the money supply is a version of the loanable funds fallacy and related monetarist fallacies. It's not just the case that bank liability expansion is not determined by their current funds. It is also the case that the ability of every other economic agent in our economy to issue a debt instrument is not limited by their present stocks of funds. Limiting what the banks can do without wrapping your arms around all of the other forms of debt and regulating them more heavily is not a recipe for greater financial stability.

Also, it seems to make a huge difference to the Positive Money people whether the only "money" that is issued in our economy is issued by the government, or whether monetary payment instruments are also issued by private agents that are part of a public-private system. This seems to be a huge ideological-moral-philosophical matter to them whose significance escapes me. There are all kinds of slogans and moral condemnations that fly around in this connection.

Anyway, I think these folks are well-intentioned but are missing the big financial forest for a few monetary trees, and think that the "money supply" is the seed of everything else, so if you control the money supply you have things under control. This analysis grows out of the Chicago School approach which was then taken up by Friedman and grew into monetarism. I think it is deeply flawed.

andy blatchford said...

Hi Simon

For me its not the banking proposals so much (although how that committee will decide how much credit in the economy is needed looks a rather daunting task)and Dan above points out a lot of other problems so is no panacea. Certainly "narrow banking" as per Warren Moslers proposals if you want no probs with that.

If you pay off public debt what are you going to replace it with? after all they are assets to a lot of people and do play an important part in the economy (although of course need to get rid of a lot of the rent seeking/corporate welfare with these things)

andy blatchford said...

@Simon
Sorry I should say I think the problems are way more than just bankers/banking. Seems to me that the whole democratic system is breaking down and more obviously in the EZ countries which you I expect have a view on as if memory serves me correctly you live in France?


F. Beard said...

In fact, one could argue that it is the ability of banking system, backstopped by government guarantees to expand money liabilities in response to the expansion of other liabilities that keeps the system from failing even more often. Dan K

At the price of failing more catastrophically when it does fail?

But justify why a so-called "free market economy" NEEDS a government backed credit cartel? Hmm?

y said...

F.Beard, what's a "free market economy"?

y said...

Why not just say "justify why the economy needs a govt backed credit cartel".

F. Beard said...

Why not just say "justify why the economy needs a govt backed credit cartel". y

That cartel, whose business is to lend stolen purchasing power for usury, killed 50-86 million in WWII alone.

But how soon we forget?

y said...

what do you mean they killed 50-86million?

F. Beard said...

The Great Depression was a (the?) major cause of WWII. Even now austerity (for the sake of the credit cartel) is destabilizing Europe.

Ralph Musgrave said...

I quite agree with Dan Kervick when he says, “The fundamental source of financial instability is the ability of economic agents to make promises for the delivery of something, often money but not always money, that they do not currently have in their possession.”

Positive Money (and other advocates of full reserve banking) claim to ameliorate that problem by stopping banks promising to return to depositors money which has been locked up in a mortgage or other loan or investment.

However, contrary to Dan Kervick’s claims, the advocates of full reserve don’t claim that full reserve will totally do away with all sources of instability. As Dan rightly points out, there are other sources of instability.

But banks were the main source of instability in the recent crisis, weren’t they?

Ralph Musgrave said...

I quite agree with Dan Kervick when he says, “The fundamental source of financial instability is the ability of economic agents to make promises for the delivery of something, often money but not always money, that they do not currently have in their possession.”

Positive Money (and other advocates of full reserve banking) claim to ameliorate that problem by stopping banks promising to return to depositors money which has been locked up in a mortgage or other loan or investment.

However, contrary to Dan Kervick’s claims, the advocates of full reserve don’t claim that full reserve will totally do away with all sources of instability. As Dan rightly points out, there are other sources of instability.

But banks were the main source of instability in the recent crisis, weren’t they?

Dan Kervick said...

Ralph, fractional Reserve banking lending in itself was not the source of instability in my opinion. The main problem was originating loans to distribute them. This means banks don't do the due diligence they would if they were going to hold the loans themselves and suffer the losses if the loans don't perform. If they can originate a loan and then get someone else to buy it immediately, they will be less concerned about the quality of the loan and the risk of default. I don't see that that would be changed by a 100% reserve requirement. If you originate a $1 million loan with 5% interest, and then immediately sell it to someone else for $1.025 million, you have already made a profit on the loan and taken it off your books. The 100% reserve requirement is satisfied and you can keep doing the same thing over and over.

There was no commercial bank run in 2008. There was a run in the shadow banking sector, derivatives markets and the money markets. How will the positive money proposal affect those?

It seems to me that the problem of commercial banking runs in the US was substantially fixed by the creation of the FDIC in 1935, after the Chicago plan was offered. So they are offering an un-needed solution to a non-problem and failing to focus on the real sources of financial instability.

I think the positive money idea is that all of those other other forms of instability are somehow fueled by "loose money" or too great a quantity of money created by banks. But as I said, I think that is a flawed monetarist diagnosis of the way our credit markets work. Credit is not fueled by pre-existing quantities of loanable funds.

Simon Thorpe said...

Hi everyone,

Just to be clear, I am well aware of the fact that the standard money system - based on pounds, euros, dollars and so forth - is not the only option. I'm a big fan of the proposals made by Margrit Kennedy, Bernard Lietaer and John Rogers in their book "People Money - the promise of regional currencies". There are indeed a large number of ways of allowing alternative currencies to develop in parallel to the mainstream money system - and I have myself proposed the introduction of what I have called "N-Euros" - debt-free national euros that can be used in parallel with the standard Euro system.

But for the time being, the commercial bank based system, using debt-based money creation by the private sector and which means that huge amounts of money are continuously being creamed off by the banks every year in interest charges, is the only one that most people get to hear about.

Yes, Positive Money is only talking about the mainstream currency mechanism. But their proposal of preventing creation and destruction of the money supply by commercial banks, and handing over the responsibilty for controlling the volume of money in the economy to an independent, yet democratically accountable authority, seems to make perfect sense to me.

Yes, that is not all there is to the economy. And there is no reason not to look at other options. But creating monetary tokens that have no debt attached and which cannot be removed from the system by uncontrollable banks is an important first step.

Tom Hickey said...

But banks were the main source of instability in the recent crisis, weren’t they?

Actually, not. The problem was not with depository banks but non-depository institutions called "investment banks" in the US, specifically Bear Stearns, Lehman Bros., Merrill Lynch, Morgan Stanley, and Goldman Sachs. While some depositories were involved, like Bank of America, Citi, and Wells Fargo, it was there non-depository activities that were the issue. The crisis boiled down to financial engineering to offload risking derivatives and securitization, shadow banking like SPV's, prop trading, and the like, in short, Ponzi finance extending to control fraud and pervasive bad practices that led to the crisis.

Warren's proposal for banking reform would eliminate this activity by banks and return banking to plain vanilla without needing to reset the monetary system, which means that it is much more politically practical.

Tom Hickey said...

JC, yes short term stock sell off not seeming likely based on this data...

The stock market is about interest rates (margin cost) and therefore expected Fed action. It rose due to QE (low margin cost) way beyond what fundamentals would justify due to QE, which was the Fed's intention. The Fed was signaling to go ahead and load up on margin and we'll cover you for an extended period.

So the current expectation is that as soon as the Fed signals that QE is over, let alone being unwound, the market will react downward, thereby canceling "the wealth" effect created by QE in theory.

Traditionally, a bear market is signalled when rates are low and the bond market is high. A bull doesn't begin until rates begin to rise and money switches from bonds (risk off) to riskier assets lie equities (putting risk on).

Tom Hickey said...

Yes, Positive Money is only talking about the mainstream currency mechanism. But their proposal of preventing creation and destruction of the money supply by commercial banks, and handing over the responsibilty for controlling the volume of money in the economy to an independent, yet democratically accountable authority, seems to make perfect sense to me.

And it doesn't to some others that trust govt less than the private sector.

Have you polled people on whether they would prefer to shop for a loan at different banks or seek a loan from a bureaucrat in a govt office.

There are always opportunity costs, transaction costs, and trade offs to consider.

F. Beard said...

And it doesn't to some others that trust govt less than the private sector. Tom Hickey

I agree but if banks are to create "money" they should do so without government assistance such as government deposit insurance or a legal tender lender of last resort.

And besides which, there are other forms of private money which do not require government backing such as common stock.

F. Beard said...

And the banks are not really "private sector" anyhow; they are a government privileged cartel.

Tom Hickey said...

There are three possible alternatives being argued, with different options in each category — 1) private only, 2) government only, and 3) some combo.

Lots of options on the table. MMT just describes the existing system.

F. Beard said...

The proper option is government only plus private only; there is no need for a combo of the two.

Dan Kervick said...

But their proposal of preventing creation and destruction of the money supply by commercial banks, and handing over the responsibilty for controlling the volume of money in the economy to an independent, yet democratically accountable authority, seems to make perfect sense to me.

Simon, why do you think efforts to target the money supply or quantity of money are important. Instability isn't a matter of quantity; it's a question of structure. The pyramids in Giza are massive and extremely stable. A two-foot tower of toothpicks is less massive and more unstable.

Tom Hickey said...

The proper option is government only plus private only; there is no need for a combo of the two.

That is a combo in the eyes of the govt only v. private only folks. Govt only folks want no private money creation, and private only want no govt money creation. In the first view, the private sector is completely dependent on govt, and in the second scenario, the govt has to get funding from the private sector and dependent on the private sector to function.

F. Beard said...

Govt only folks want no private money creation, and private only want no govt money creation. Tom Hickey

Government money should be legal tender for government debts ONLY* though people could voluntarily use it for private debts too. Private money, otoh, would only be good for private debts.

The mistake is to insist on a combo money supply for both government and private debts. That combo is bound to lead to abuse as it has done so under both a gold standard and a fiat standard.

*After a universal bailout of the entire population with full legal tender fiat to force the banks to accept it.

y said...

"there are other forms of private money which do not require government backing such as common stock."

That's not actually money though, is it? It's stock. Houses aren't money either. They're houses.

Many people argue that there are different degrees of "moneyness", depending on the liquidity of the thing in question. So some stocks could have a high degree of "moneyness" if they are highly liquid. But they could never serve the role of money itself.

y said...

"Government money should be legal tender for government debts ONLY"

That would require that state courts of law not recognize the state's own currency as a legitimate means of payment of debts. Which wouldn't make much sense really.

F. Beard said...

That would require that state courts of law not recognize the state's own currency as a legitimate means of payment of debts. y

No. Government money could still be voluntarily used for private debts and existing contracts would still be honored. And a universal bailout with full legal tender fiat would help to ensure that those existing contracts could be honored.

y said...

Government money *is* voluntarily used for private debts. But because it's legal tender, once payment has been made with govt money, the courts will always recognize that payment as being valid and final, with no further payment needed. in contrast, if you pay a bill with your own IOU, or with some sort of barter excahnge, the payee could potentially claim that final payment was never made.

F. Beard said...

Perhaps, I misunderstood. Federal money would still be legal tender for state and local taxes too.

F. Beard said...

There is no logical need for government money to be legal tender for private debts.

y said...
This comment has been removed by the author.
y said...

There is a practical need for a form of payment that is recognized by the law as being final. Hence the term "legal" tender.

It is logical that (state) courts should recognize state money as being "legal" tender. Otherwise the state wouldn't "know" whether it had actually paid someone or not.

F. Beard said...

A State would ONLY use fiat but for private-private transactions fiat should not be required or even privileged beyond its natural advantage. And there are private money forms that are not IOUs; common stock is one of them.

y said...

state money isn't "required" for private transactions. It's just a form of payment which is recognized by law as final payment - not a prelude to some other form of payment, but final payment in and of itself.

Common stock is a form of IOU, in that it's a claim - a contract in which the issuer promises something to the buyer.

If you were to buy $1000 common stock in a company that wouldn't give you the right to go in there and rip out $1000 worth of stationary or furniture from their offices.

If you're going to call common stock money then you might as well call anything else that has a degree of liquidity "money".

F. Beard said...

Common stock is part ownership of a company; it is not an IOU. As you say, one cannot redeem common stock so there is no debt.

Common stock is a debt-free form of money that "shares" wealth and power.

y said...
This comment has been removed by the author.
y said...

A common stock certificate promises you, the owner, something in the future - such as dividends, or maybe money in the case of liquidation. As a promise, it is a type of IOU.

It doesn't say that you can go into the company headquarters and take your share's worth of equipment away in a van.

Common stock would be money if it were used as money. But it's not. If a stock is highly liquid, however, then it does have a degree of "moneyness", or similarity to money.

F. Beard said...

Common stock would be money if it were used as money. But it's not. y

But it would be if the present government backed credit cartel were abolished. Then business would be forced by economic necessity to "share" wealth and power rather than concentrate them.

So there IS an ETHICAL alternative to the present form of endogenous money creation and it is one that is philosophically compatible with a free market economy, unlike the present one.

y said...

why would stock become money if "the present government backed credit cartel were abolished"? It wouldn't suddenly become more liquid just because banks no longer have FDIC insurance or access to a central bank.

y said...

I assume there are still banks in your future scenario?

y said...

I think even if you removed all taxes on stocks that wouldn't turn them into money, given gresham's law.

F. Beard said...

Because real interest rates in fiat would no longer be suppressed, business might easily find it cheaper to raise capital by issuing new common stock and by accepting it in exchange for its goods and services, bypassing the need for fiat except for the payment of taxes.

Purely private banks might still exist but with vastly less leverage since bank runs would be a constant menace to them.

y said...

ok, if there was a scarcity of money (like there is in Greece, for example) then people would start using other things more often in their exchanges. Stock still stikes me as being a bit clumsy, given the fact that each stock has a different and constantly changing value. So you would need a genuine scarcity of 'official' money

"real interest rates in fiat would no longer be suppressed"

you mean interest rates would be higher? But then businesses would have to offer higher dividends, for example, to attract buyers.

y said...

"Purely private banks might still exist but with vastly less leverage"

If you look at banks in the 19th century, not having access to a state central bank didn't stop them from having constant financial crises. "Discipline by the free market" didn't seem to work very well.

F. Beard said...

Dividends are dumb since the point of a common stock company is to consolidate capital, not dissipate it. Instead, as the value of the common stock increased, profits would be distributed via stock splits and/or invested in more real capital.

F. Beard said...

"Discipline by the free market" didn't seem to work very well. Y

Because it wasn't a true free market. Governments, for example, still accepted gold and silver as money when they should have only accepted fiat issued by the monetary sovereign (e.g. the US Federal Government). Governments may even have accepted bank money!

y said...

but wouldn't higher interest rates tend to push stock prices downwards, push more money into bonds and savings accounts, and increase business costs?

y said...

"Governments, for example, still accepted gold and silver as money"

That was the "state money" at the time, as well as some paper notes, with Treasury bonds also serving as a form of "currency" among banks.

It seems to me that finance simply has a tendency to periodic busts, unless it is restricted by law to low-risk activities.

F. Beard said...

It seems to me that finance simply has a tendency to periodic busts, y

Because usury is unstable. But common stock is spent, not lent, into existence. (Fiat is spent into existence too which is why it can be used to smooth out the so-called "business cycle").

y said...

Stock isn't spent into existence, it's sold for money. People buy stock because they want to hold it, not because they want to use it to buy gasoline or potatoes. The most liquid stocks are those which people want to hold on to the most rather than sell, whilst the least liquid stocks simply aren't liquid enough to serve as money.

Andrew Jackson said...

Hi all,

Just to be clear, Positive Money certainly do not believe in the loanable funds view, and neither are we monetarists - perhaps the biggest influences on me are Minsky, Werner and Godley. Anyway, in the book Modernising Money we spend a great deal of time explaining how lending precedes deposits, base money is endogenous , and banks in fact ration credit (as proposed by Stiglitz and Weiss, for example). Along with the fact that the demand for credit is always high due to limited liability and laws that favour debt financing, causality is determined (i.e. in normal periods banks, not demand for lending, determine how much they lend and therefore the supply of debt and money). In benign economic periods, banks profit the more they lend, and as a result their incentives are skewed to lend as much as they can, creating new broad money and debt in the process.

The increase in the money supply increases aggregate demand (as Steve Keen argues), and when this increase in demand is applied against assets with an inelastic supply (such as land, stocks etc.) price increases are the only viable result. This leads, as Minsky argued, to the economy reacting in a pro-cyclical fashion, with financial instability the result. (as an aside I believe this was the cause of the asset bubble in the US and elsewhere, securitisation merely accelerated the process. Banks would have made the subprime loans without securitisation – they believed that rising assets prices meant that the homes could have been repossessed and sold off at higher prices anyway).

There is very little which can be done to limit bank lending in the current economic system – interest rates are an ineffective tool for all the normal reasons, whereas additional capital is not difficult to raise in a boom.

The problem is that banks cannot be allowed to go bust – of course there will be the normal issues with panicked markets and the cascade effects of bank runs, but the underlying issue is that the vast majority of ‘our’ money exists in the form of bank deposits, and the shrinking of these deposits lowers aggregate demand, creating the conditions for a debt deflation (as in Fisher). Deflation then increases the real value of debt.

What Positive Money’s reforms do is to split the lending side of banks from the payment system; to split the money supply, and therefore aggregate demand, from the supply of bank loans (debt). We essentially put banks in the same bracket as every other business that wants to lend money. Under the PM system banks lending will not increase aggregate demand and therefore asset price bubble will be less likely. And with everyone in fact holding accounts at the central bank, the failure of a bank will not have large macro-effects. Banks will thus be allowed to fail at no cost to the taxpayer.
What Positive Money recognises is that banks are in fact performing a vital public function, the creation and custody of the nation’s money supply. You can therefore either have a private banking system with the public creation of money (the PM proposal), or an in fact publicly owned banking system in which money created by lending. We currently have the worst of both world, a system in which banks are privately owned and lend as much as they can, that benefits (profits) from this lending when times are good, but which are rescued by the taxpayer when times are bad. Our current monetary system only works because of state support.

Finally, just as an aside Positive Money’s is not against the freedom of individuals to enter into financial contracts, what we are against is that the promises of certain institutions begin to function as money, with the result that these institutions become guaranteed by the state. These guarantees create moral hazard, increasing risk and the possibility of crisis.

Andrew Jackson said...

Also, just to add as there seems to be a little confusion, under the PM system there would be no individuals approaching the Gov to get a loan, banks would still make loans as now, with the funds provided from one of 2 sources:

1. Time deposits - i.e. someone else gives up access to their money for a period of time and this money is transferred from one account to another.

2. The government (central bank) could lend money to the banks to on lend to business. This would be likely to be used if businesses were suffering due to a lack of available credit.

F. Beard said...

Stock isn't spent into existence, it's sold for money. y

Not necessarily. Common stock as money could directly buy goods and services without using a foreign money as an intermediary.

My point is that the current abomination, a government backed money cartel, is not necessary - that an ethical form of endogenous money creation exists.

So there is really no excuse for continuing the present system.

F. Beard said...

2. The government (central bank) could lend money to the banks to on lend to business. Andrew Jackson

How is this different from the current system since the central bank usually remits its profits to the central government?

Nor should money be lent into existence. Nor should government be in the money lending business since that is inherently discriminatory.

y said...

"Common stock as money could directly buy goods and services"

Companies do sometimes pay employees or management in shares, but the idea that this could be used for all expenses is fanciful. A company can't fund itself by just issuing shares to everyone it has to pay.

When employees are paid in shares, those shares are not money - they're ownership stakes in the business with a certain monetary value. The employees receiving the shares don't then buy their food at the supermarket by handing them over at the till. That would be ridiculous.

Using share-issuance instead of money (to buy equipment, supplies etc) would be like asking everyone you do business with to become an investor in your company. It's not going to happen.

Besides, would I want to own your company's shares if I know that you simply issue new ones every time you have to pay a bill?

Payment in shares can work when the sums involved are reasonably large and the people receiving payment have an interest in the company, and - crucially - they do not need to be paid in money. Beyond that, it's difficult to see how it would work.

F. Beard said...

Besides, would I want to own your company's shares if I know that you simply issue new ones every time you have to pay a bill?
y

Who is "you?" As soon as you receive common stock money "you", as a co-owner, can vote on whether or not new common stock is issued.

Sure, the present system, based on usury for stolen purchasing power, is pretty convenient for the thieves - until their heads roll in a revolution. But if you want a socially stable money system, ethics are paramount in money creation.

Besides which, fiat lent at honest interest rates would be an option too.

y said...

ok I understand that you hate all banks, but the point is "common stock as money" isn't a much of a solution.

If you were to get rid of the central bank and FDIC insurance, along with all other government supports and subsidies for the banks, "common stock" wouldn't just "become money". People might use payment in stock more often in some future scenario, but I can't see it being very widespread outside of certain very limited contexts.

I have nothing against the idea, I just don't think its realistic. But I could be wrong as I'm no economics expert.

"you", as a co-owner, can vote on whether or not new common stock is issued."

ok, but if I see that your company currently tries to finance its purchases by issuing stock to all and sundry, then I'm unlikely to have confidence that your company won't be doing that in future. Yes I could vote, but if I only have a small share I'm not going to have much of a say. Again, it's a level of involvement that I simply might not want. Or I just might not want shares in your company, period. I might just want to be paid for my goods and services in money, which I can then use however I like, thank you very much.

Your idea of common stock as money is quite close to barter, and seems to ignore the basic problem of barter - the non-coincidence of wants - which money overcomes.

I think you're right that the money system should be ethical, and I think there are many ways in which it can be changed and improved.

F. Beard said...

Your idea of common stock as money is quite close to barter, ... y

Not at all! A common stock company might produce any number of goods and services. Moreover, just like money, any number of shares may be created at very low cost.

Common stock money solves the potential problem of high real interest rates once the banking cartel is abolished.

Andrew Jackson said...

F. Beard said...“How is this different from the current system since the central bank usually remits its profits to the central government?”

the central bank is in complete control of the money supply, as it is its decision to lend the money or not.

"Nor should government be in the money lending business since that is inherently discriminatory."

the Central bank auctions the funds to banks, so no discrimination.

"Nor should money be lent into existence."

We would also like to see the vast majority spent into existence, so it does not enter with a corresponding private debt. The reason for the lending facility is to prevent short term credit crunches, particularly during the transition to the new system.

By the way I am assuming a publically owned central bank.

F. Beard said...

the Central bank auctions the funds to banks, so no discrimination. AJ

Wrong. The discrimination is against those whose purchasing power is diluted by the new money lent into existence.

As for short term liquidity needs, surely the private sector can accommodate those.

y said...

"Not at all!"

Well it is really.

Say you come to my shop and try to purchase something in exchange for some Apple shares. What if I don't want your Apple shares?

Non-coincidence of wants: the basic barter problem.

If on the other hand you come to my shop with money - no problem, buy what you want.

(Lots of goods can be produced at very low cost by the way).

"Common stock money solves the potential problem of high real interest rates"

Only if stock were to be generally accepted as "money". Which I keep saying it wouldn't, because it's not money and doesn't have the charateristics of money!

You keep repeating your statements but you haven't really demonstrated why stock would work as money, or explained why it's not used as money now.

y said...

"The discrimination is against those whose purchasing power is diluted by the new money lent into existence"

You sound like Bob Roddis now.

F. Beard said...

Which I keep saying it wouldn't, because it's not money and doesn't have the charateristics of money! y

Why not? Bank notes were once widely accepted (during the "free banking" era) and they conveyed only a probable redeemability in specie depending on whether one was first or last during a bank run. But common stock as money is not subject to bank runs.

Of course no truly private currency can compete with the current government backed counterfeiting cartel.

F. Beard said...

You sound like Bob Roddis now. y

Well, as an apartment dweller, I've watched my ability to buy a house without borrowing be diluted. Blacks, when "redlining" was prevalent, did not even have the option of borrowing.

Besides which, I am all in favor of inexpensive fiat - for government debts ONLY*. Nor am I in favor of deflation.

*After a universal bailout of the population with full legal tender fiat so as to force the banks to accept it.

F. Beard said...

What if I don't want your Apple shares? Y

Then I go to a more flexible store and you lose business to them.

F. Beard said...

My point is that the current unjust system is not necessary; there are ethical alternatives that require neither usury nor government privilege.

y said...

"Bank notes were once widely accepted"

Has there ever been a time when stock was used as a generally accepted form of money?

F. Beard said...

Has there ever been a time when stock was used as a generally accepted form of money? y

The common stock company was only invented in 1602 - later than central banking and centuries after double entry bookkeeping. Imo, it has never had a fair chance to compete.

y said...

"then I go to a more flexible store and you lose business to them"

You could say the same thing with barter: "you don't want my barter goods? ok, I'll go somewhere that does".

In practice most payments are made with something which is widely accepted as money. Societies only resort to forms of direct barter when no such money-thing exists.

y said...

"as an apartment dweller, I've watched my ability to buy a house without borrowing be diluted"

If there is something which is both highly desirable and in limited supply, such as houses, do you not think that people will always find ways to bid up their prices, unless some constraint is imposed exogenously on their ability to do so?

F. Beard said...

do you not think that people will always find ways to bid up their prices, y

No, because the evidence during deflation is the lowering of prices, however desirable a house may be.

y said...

Ok, so you might have asset-price bubbles followed by busts and price deflations. Like the 19th century, basically.

Andrew Jackson said...

F.Beard said...
"Wrong. The discrimination is against those whose purchasing power is diluted by the new money lent into existence.

As for short term liquidity needs, surely the private sector can accommodate those."

As I said, the central bank will lend to the commercial banks to on lend if only if businesses are suffering. The conditions placed on this loan would be that this money is not lent to fund asset price bubbles, so no mortgages or financial intermediation.

The loan stimulates production that would not otherwise of happened (i.e. the economy is operating at way below capacity - this is pretty much the condition for the central bank making the loan), so that although there is an increase in the money supply there is also an increase in output. Thus there is no inflation and therefore no fall in the purchasing power of money.

And yes, I would agree that normally banks would fund themselves in the markets. The lending by the central bank to banks is just a safety valve, to be used only in extreme circumstances.

F. Beard said...

The loan stimulates production that would not otherwise of happened (i.e. the economy is operating at way below capacity - this is pretty much the condition for the central bank making the loan), so that although there is an increase in the money supply there is also an increase in output. Andrew Jackson

A universal bailout of the entire population at least until deposits are 100% backed by reserves should provide all the liquidity business would need. And such a bailout is just compensation since the banks have cheated both debtors and non-debtors.