clearing banks and money creation Role banks in setting monetary A debate has emerged on the blogosphere about a point that we thought settled long ago, that of
origin of money creation .
Simply put, one of two theories gives the commercial banks, private or public, but said second-tier
power to fuel the economy - or speculators - in additional money, money "bank" or currency "scriptural" - far beyond the currency of "legal", ie the currency issued by the central bank, the Bank of France when one thinks in francs, the ECB if we think in euros. A video with its faults and qualities, is currently circulating on the internet to expose this position is that of Paul Grignon
, "money debt" .
The second argument, essentially defended in France by another Paul, P. Jorion (and in Germany by H. Creutz), is that
money creation by banks in the second row is an optical illusion , and that generations of so-called experts or academics unenlightened have confused
money supply and circulation Monetary .
This last position we will try to understand, before giving our opinion.
In his book, "Money, user manual," Paul Jorion who likes to appear as trans-disciplines - from anthropology to psychoanalysis, to economics and cognitive science, devotes three chapters (5.6 and 7) and 100 pages (at pp129 pp228) in its argument, and thus the criticism of the traditional, still largely dominant. We will devote ourselves mainly to the study of Chapters 5 and 6, Chapter 7 is devoted to the Central Bank, subject apparently less confrontational in his role, motor or follower, almost.
P. Jorion first wondered why the "others" were, or would, deceived at this point. P. Jorion, organizers
"other" in three categories, bankers, economists, and finally the "revolutionaries" more or less plots. For P. Jorion, bankers, who obviously know "THE" truth (ie there is no money creation), lend themselves to play the other two categories because of an inherent fragility in the banking system,
" the constant threat of bank runs ". To avoid the blunt truth would lead customers to panic, bankers remain very vague on the actual monetary mechanisms.
P. Jorion then introduced a thesis quite subtle - but that he considers erroneous is the cause of the error of so many economists for centuries,
that of "methodological individualism" .
Such as I understand it in his presentation by Paul Jorion, he accuses her of any defenders deny
interactions between economic agents , at least on the money question.
If this were the case, I think, too that is a mistake and a contradiction in the reasoning taken by Paul Jorion economists. Illogicality of much more serious than P. Jorion remember rightly, that economists use the metaphor of the invisible hand to justify, or claim, the existence of markets as interactive as possible.
Having lent economists point of view inconsistent: individualistic "monetary", "globalists" in other contexts, P. Jorion suggests in Chapter 6, a certain laziness can explain, if not excused, reasoning, he considers wrong, these same economists.
They were content to make the "cut and paste" (even before the desktop tools) from an old argument, misunderstood or herself wrong. Thus he writes (p.148) "These explanations seem to have been copied over the years, without anyone wondered too if this description reflects the way things happen in reality."
After processing economists inconsistent and lazy, they conceded an excuse. They have misunderstood Schumpeter, who would have distinguished him, the appearance of the essence of the phenomenon. For Schumpeter, edited by P. Jorion,
all happen "as if there were money creation, but in fact there would not be. As also
P. Jorion Schumpeter on another critical point, which disturbs the reconstruction money, the result of using the ideas of Schumpeter does not seem fundamental.
I even suggest that this inconsistency in the treatment of Schumpeter P. Jorion disservice rather latter, as inconsistency lends some Paul Jorion economists. (You can refer to Schumpeter's ideas on money on:
or
, but it's not the point here is whether Schumpter right or wrong, let the dead bury the dead .. .)
last category, finally, those who defend the thesis that opposes P. Jorion in its own monetary theory, that of more or less
revolutionary conspirators, or anti-conspirators is not clear.
In fact, P. Jorion wrote explicitly that it would not be too serious there are proponents of "money creation ex nihilo" by the non-central banks if a certain current of opinion was not denouncing "the scandal that commercial banks create money ex nihilo."
For P. Jorion, after bankers opaque - what is true, they are "opaque" - after the economists lazy or inconsistent - there would finally all the others who would find scandalous that banks have the power of money creation. Somehow, these "revolutionary" invent an imaginary power to be able to attack the real - this one - the banks.
To illustrate the existence of this current (there are actually people who cry scandal, but because they think, wrongly or rightly, that there is scandal) Paul Jorion blames Allais, price "pseudo-Nobel Economics (The Nobel Prize in Economics n does not exist: it is simply the equivalent of economy of the Fields Medal in mathematics, there is no Nobel Prize in mathematics).
He's not going to call him a senile - especially as his great work, that of Allais, was written in 1976 at age 63 or 64 years, the current age of P. Jorion - but he compares his reasoning, and employment by Allais the word "considers" that of a severely retarded Oscar (p. 140) who "sees
being manufactured by casting the gruyere cheese around the holes."
Having thus "discredited" the "considerations" of Allais, and therefore the latter, P. Jorion falls into the same bag, that of "abolitionist" (P. Jorion prefer to use the word "creationist") all the proponents of a conspiracy to hide the bank false truth, that of money creation by commercial banks. This false truth would
the revolutionaries of all stripes to go after banks. In summary, the crusade
P. Jorion is justified by lies, inconsistencies or ulterior motives three categories of individuals, sometimes overlapping,
mysterious bankers, economists lazy, and revolutionists hate. course, this does not mean that P. Jorion wrong. That's what we'll try to see, after this long preamble trying to explain the position "qualitative" P. Jorion, scattered between arguments, anecdotes, examples, taunts and various fables throughout 100 pages written with talent, if not without redundancies.
The focus of the demonstration of P. Jorion
is that the "principle of conservation of numbers' , which will allow it, he thinks, to show that economists, when they err in good faith mistake in fact" increase in the money "and" speed variation of the money. "
If I can afford this analogy, which is not in the book of Paul Jorion, assimilating the money (we have not yet defined, we shall return) blood, economists confuse blood volume, blood stock (6 to 8 liters in an individual "normal") with the fact that thousands of gallons through the heart of every individual in a single day.
If this were the case, confusion between stocks and flows (supply of blood or money, and blood flow or money), we understand the emotion of P. Jorion before such a position of economists, mostly academics.
Now back to the central point of the argument, the principle of conservation
quantities, used many times in the book of Paul Jorion and on his own blog, before and after the publication of this book.
As long as we remember the basic principles of physics, this principle sounds good:
in nature, nothing is lost, nothing is created, everything is transformed (even if the Big Bang does not really fit into this category, apart from this "small" detail, this law was never really challenged).
So the principle of Paul Jorion is neither revolutionary nor incomprehensible, I would even write that one can adopt it - especially since it does not prove anything, at least until the it did not specify what you're talking, of
how much it is .
The question here is, in fact, and it took a replay of three chapters under investigation (ch 5, 6 and 7) -
I know I could get there faster ;-) - to see which was - perhaps the reader to judge - the real trick, voluntary or not, Paul Jorion. In private exchanges with P. Jorion, in March 2009, he had also been some discussion to understand what was hidden - deliberately or otherwise - behind the semantics behind a simple word, the word "money".
In fact, Chapter 5 of "money, user manual, the word most used is" money ". In Chapter 6, this word is hardly ever used, it appears most often replaced by "money", a semantic shift in which we question.
In fact, in none of these contexts,
the exact definition is given . Reading between the lines, I propose the following definitions:
1) For Fr Jorion Chapter 5, the word money is what is usually called "fiat money", or "paper money" or "currency-notes' (neglecting the fraction represented by parts) - that the international monetary authorities call "currency". The best translation of this
"money" might be "cash" . It can be seen often this inscription on the threshold of some stores' cash or credit card accepted, returned check "
is also what in popular parlance is called sometimes" (money) liquid "," say, did liquid you can lend me? "They say fluently. Presumably, then, that when Paul Jorion speaks of "the principle of conservation of numbers', it is said that the" liquid "in circulation, or" species "Outstanding, increases (s) never (at least mere commercial banks, which have no power to issue," manufacture "of tickets," species ").
As nobody has ever suggested otherwise, that is a banker, economist, conspiracy or mere "village idiot", the great principle of Paul Jorion not used much, but it is not, and can not be questioned.
At least as we look at the banking system and economic system "beyond the central bank." The sole authority, in fact, may affect the amount of circulating liquid, and thus contravening the principle of conservation of quantities of "liquid" is the Central Bank (a restriction, it would be better to speak of "base money")
2) For what I 'I understood P. Jorion Chapter 6, we come finally to the "currency". Again, ambiguity is high.
In the sub-title of Chapter 6, we talk about creating
money banks (position at which opposes P. Jorion, we have said), and just after it says "creating
money ex nihilo "as P. Jorion challenges - but everyone too.
In fact, it
in this semantic shift - voluntary or otherwise - between money and money I is the crux of the problem . If
"currency" = "money", P. Jorion is right, and the debate was concluded - and should never occur. If "money" is different from "money", the whole argument of P. Jorion collapses, as we shall see.
It is true that there is a real challenge to rigorously define the word "money." Both the definition of money, cash, was simple, its media is obvious (the central bank money closely, as though creation of the central bank) as
the currency is "bright", more "conventional", more "virtual" and therefore more questionable. I propose to change the following definition:
"Money is a means of payment accepted generally by members of a given community in settlement of a purchase of goods or services, or a debt" . Two examples: "species", the money talks P. Jorion Chapter 5, checks this definition (even if we refuse cash payments in cash over a certain amount, and if most of the economic agents in a given community are obliged by law to hold a bank account).
The "deposit money bank", ie the amount of which is entered in the various accounts (CAV) is called instead deposits (DAV) appearing in the banking system also meets the definition .
can certainly, in some cases, refuse a check - on the pretext that it would be bounced. But it may also refuse ticket on the pretext that it would be wrong.
The only apparent difference, and quite true in theory, is that the currency
"scriptural" bank, which appears in the DAV does not explicitly being "legal."
So back to the argument of P. Jorion, trying to understand when he speaks of "money", if the "paper money", cash, or anything else.
Our thread is that Paul Jorion tries to convince us that "money" does not really exist outside of paper money, and that "Money" is "merely" a bookkeeping trying to memorize the flow of the only "real money", the "paper money".
In other words, if what is traditionally called the money supply increases (eg measured by the monetary aggregate M1) is simply that
"real money", the "paper money" runs faster. To resume my metaphor of blood: the blood volume would remain the same, but the blood would flow faster. Comparison is not right: one could also say that "real money" is symbolized by "red blood" and that bank money is the blood volume itself.
The fact that challenges any observer, in fact, is that the mass of the "paper money" - the mass of money - does not move quite as "money", as it appears in monetary aggregate 'narrow' M1.
remember what that M1: the sum of coins (coins =) + + bank money fiat money, or the sum "cash plus bank accounts (sight). It
what the Bank of France in 2000 defined as' the commitments can be used as means of payment, stating explicitly: deposits, ie bank accounts for more fiat money ' [in summary: DAV more cash in circulation].
is also what some call "liquid assets" of non-financial economic agents). Other aggregates
"wider" exist, M2 and M3, but their exact definition is less "standard" and does not concern us for this presentation: they integrate assets "less liquid" than the bank money.
Over the last 15 years, the ratio "M1/espèces" evolved in Europe between 4.8 and 9.35, with an extreme point in February 2002 to 9.35 (early days of the changeover to the euro), 2 years to stay below the threshold of 6.2. Currently (November 2009) this ratio is around 5.95. This figure correlates to what is sometimes called
money multiplier (which corresponds to the quotient instead of "DAV" / "species" ie [M1 fewer species] / [species]) .
P. Jorion not deny the existence of these figures, although it is careful to talk about explicitly. He prefers to dismantle what he continues to call the error of "creationist" and says the currency that circulates, when it is described by the "accounting" is none other than real money, cash.
For this, he begins to distinguish
, quite rightly, two types of financial institutions , those who do not have bank status and which are just intermediation: in other words, these non-financial institutions bank use "merely" excess cash, savings, economic agents would have too much ... what, anyway?
I would say "money", as defined in Section 5 of P. Jorion, that is to say "cash" but P. Jorion is not so clear. This overflow of cash, "paper money" - once again ignoring the parts to become insignificant amount - is transferred by these financial intermediaries to economic agents who, themselves, would be enough money.
Again, on this point, no one disputes. Savings Banks (Squirrel or Post Office) have done this since time immemorial, other institutions also. The principle of conservation of species, the "real money" is retained.
This would also happen if savings were not cash, but already bank money. It still would not increase the money supply, it concerns only the species, "cash" or it is also about "money" that would have been spared.
The "creationist" and "Jorion" have no disagreement on that plane. P. Jorion will introduce now the banks, saying they are
"different from" non-banks "while doing the same," by retreating behind the authority of a certain Besson: after all, why not?
banks are presented as Specialists monetary intermediation (the word mediation, suggesting that they are only intermediaries, not "augmenteurs, let alone designers), which do not grant credit, but simply to" open "lines credit. The only difference between NBFIs and banks would be an accounting issue and naming of accounts.
P. Jorion will then justify that there is increased funding - which is true
- without increasing the "cash" - which is true
- and without increasing the money supply - What is wrong
using the following argument.
This is known to increase the money supply - reflected by the increase of deposits, DAV - is an optical illusion. It would simply cash from cash, which circulate.
rationale:
the same ticket can be in two places (one has ever disputed this, no need for the "principle of conservation of numbers') . So the credit is a bookkeeping entry, not "performative," that's because we recorded a total an account that species are - actually, this is not the case - and that the "currency" is - that is what is wrong: "money" is good. Written
otherwise (my addition) we know that the word "dog does not bark, just as the image of a horse does not rue. THEREFORE, the registration would not be scriptural currency, it would be merely an "image" of real money. Whereof think P. Jorion. To validate this
, P. Jorion tells a story of Africa. A clever employee, Benin, withdrew cash, the "real money" in the evening. By night he would buy in a neighboring country local goods cheaper, returned at daybreak, reselling its products more expensive, then brought the cash, cash, his bank shortly after, having made his profit. That proves, according to P. Jorion, that money creation is a myth (in this case is obvious: while withdrawing cash only, and you repay in cash, which is difficult to imagine an increase in quantities - apart from profits made, which had to be taken to someone).
What then does it really in the "secret" bank loans? I will pick the same approach (pp. 141-146) that P. Jorion, but arriving at completely opposite conclusions.
Eusebius deposit cash, 100 euros, the bank A, assumed no initial monetary resources. Due to a factor of 10% of "fractional reserve" bank A can not lend as 90 euros, Casimir. For now, there is always "somewhere" 100 euros in cash, with an outstanding loan of € 90. How
euros available? That's the big question. If
Casimir claims his loan "cash", "cash", "paper money "," Fiat money "," legal tender "," currency "(P. Jorion what does not), there will be 90 euros available in the pocket of Casimir, the higher the DAV Eusebius posted a $ 100 euros. Does the 100 euro deposit of Eusebius are available?
Again, if Eusebius uses the DAV with his checkbook or bank card, no problem. If he wants to remove the distributor to Bank A over 10 euros, Bank A will have a liquidity problem: say panic P. Jorion. Again, one can certainly involve the "principle of conservation of numbers' tautology if is.
What can be deduced rigorously from the beginning of this reasoning? a) First, that species are not created by commercial banks: they knew.
b) Secondly, that as usual we will make loans (cash withdrawal, transfer or bank money or cash payment, or re-filing scriptural) we will be, or not, short of cash: again Nothing new.
c) We can also conclude, as does P. Jorion, that "fractional reserve" are intended to prevent too many cash withdrawals, cash, can lead to a panic bank.
d) But we can also conclude that this is not P. Jorion,
as banks try not to pay more cash, more cash than necessary . If Casimir simply does not "remove" or only use of bank money, the risk of any panic moves accordingly.
The existing banks also seek to discourage their customers to withdraw money, there is even now banks "cash free" on the Internet that make it their motto. From a practical point of view, practice, one can say that in an economic context "confident" the theoretical ratio of "fractional reserve" is realized by a relatively high ratio M1/Currency (early 2003, the value around 7, if we except the particular case or early 2002, before the new tickets become available, we probably use more bank money "euro" as combination tickets euros or francs for France, euros or marks for Germany).
Since 2008, this ratio M1/currency "is closer to 6, but still no
banking panic on the horizon .
The only point on which nobody thinks to give harm to P. Jorion is as follows.
Principle Conservation quantities or not, if each is custodian of DAV "transform his account in cash, with" cash "into" species "as" paper money "into" paper tickets ", panic insured, the cash crunch.
But why should we? It's so much easier to buy using his credit card, her checkbook, her account "paypal".
Admittedly, the banking system may collapse if the underlying economy collapses. But in this case, that paper money be worth? The best solution in this context catastrophic potential, might be to resort to barter, then rebuild a monetary system on a new basis.
What the argument of P. Jorion led us to introduce or clarify - and it is therefore thanked - is the question of the purpose and use of money. If
Casimir borrows "money" for an economic activity that will be able to have some impact, the loan has been useful: he can repay the loan. If this "money" simply takes the form of cash, "liquid", and if these species are taken to be trademarks under the mattress, the principle of conservation of quantities will play in the wrong direction: 90% of species, from cash, will leave the economic cycle.
S. Gesell spoke of this risk, and potentially very serious consequences, hence the idea of currency
melting, losing value if it is not spent quickly.
On the contrary, if the loan is returned Casimir, directly or indirectly in the economy (investment-production-consumption) not only a cascade of borrowing can take place (bank B receives all or any part of Casimir investment will itself be able to lend up to 90% of this investment, etc..), but this cascade will have two effects.
Fueling the economic sphere in payment methods, and allow Casimir, and the sequence of borrowers who will have appeared through the banking system to repay their loans. For if those P. Jorion called creationists are right about the creation of "money" by banks, they should also be called "destructionists" because they do not forget that the loans - even scriptural money - will be refunded (there still money). We can see in this regard the book Allais, published in 1977, the "capital tax and monetary reform."
In other words, a "good" economic system of a given community, bank money should, year after year, increasing nearly as production, consumption and investment community in question and, if the rate of "fractional reserve" does not move too much, he should be the same for the mass of "paper money" is considered the "paper money" as the real blood, such as blood or red, economy .
Why this debate, then? To me, the "creationist" think
commercial banks have too much power , and that the granting of credits in "money" are not always, perhaps not often, to serve the common good, and should therefore be further controlled. Some even go - it is not, or more, my position - wanting to impose their fractional reserve of 100%, "100% money" This is the point of view of I. Fisher, Allais, Robertson and a few other "abolitionists".
In other words, commercial banks should no longer be allowed to extend credit beyond the cash resources, cash resources, they might have. In a private exchange, I asked P. Jorion why he would oppose such a measure if, for him, there is no private money creation. Despite the courtesy of our exchanges, I have not had any response on this point.
Always in my opinion, P. Jorion and its supporters, including H. Creutz, which I will in conclusion, think
the banks' responsibility in the current crisis is secondary , their general power is limited, and no power of money creation.
It would be essentially the Central Bank which would be responsible for excess cash, the banks being responsible for "only" because they lend some "real money", cash, savings, real, to personnes.Il bad is not necessarily "too much money" there would be a misuse of this "money."
course, not everything is wrong in this position is simply
reasoning "monetary" P. Jorion to achieve these recommendations seems wrong .
What would be the monetary reasoning "correct"? Consider three players in our "community socio-economic, community C, three" sectors ", three interacting systems. System E is that of economic actors, "real" actors, actors who do not belong to the world financial and banking. The FB system is the financial and banking system, with the F subsystem that will handle the "real savings", the subsystem B is intermediate between real savings and borrowing system E, the BC system is the central bank, which alone has the right to create money-paper, "paper money".
At time 0, year 0, assume that the FB system is a real savings in "cash" (do not complicate the moment: we can assume, if you will, that banks and the central bank had just been created and supplied to the B system, directly or not, this "cash"). Say that this cash represents 40 billion euros, the total value of production of our community C is 2000 billion euros, the available cash that is about two months of production, say 400 billion.
The 40 billion euros "saved" are requested by other system elements FB, only to consume or to replenish equipment. In this case, provided constant technological, demographic and stable, there will be no need for additional funding to invest for the future. The principle of conservation of quantities plays full
Now suppose we consider a 1% growth in the future to reach a production-consumption-investment of 2020 billion. The current savings, even transformed into ready cash, will not suffice. The subsystem F FB system can only spend cash in one hand - "those who have too much cash" to another hand-those who lack "cash".
is where the subsystem B is involved. Suppose that we should, in addition, invest $ 30 billion surplus. The subsystem B will face the projects deemed credible and creditworthy, loaning $ 30 billion, it does not, by assumption. It will simply "anticipate - that is the big word, the philosopher's stone of the whole building, the concept is lacking in the arguments of P. Jorion (and many others monetary experts, alas, creationist or anti-creationists, especially proponents of the "monetary veil").
subsystem B will simply anticipate that borrowers will be able to repay due to excess production and therefore revenue, helped by their additional investment.
subsystem B does not "create" the cash, but she has no right. It will "create money", to compete, hypothetically, 30 billion euros ("cashless" bank ").
growth is expected by 1% and inflation of 0, it will simply require to receive, after a year, a full refund of the $ 30 billion, plus interest "ethics" of 1%.
In this context, the subsystem B will contribute to "honestly", "ethics" on economic growth, assuming of course that expectations are realized, that borrowers repay. Between the beginning of year 0 and the beginning of Year 1, the subsystem B will have created 30 billion in additional money, which will be repaid in that currency, plus of course the interests of 300 million ** .
Two additional remarks. a) In general, the banking system requires more than interest rates "ethics." More banking system ready, and it grows, it does not encourage the wisdom, of course, especially since it lends resources that do not belong to him.
b) The banking system, due to some control of our third system, the Central Bank can not lend as much as he wants, and is happy. In our example, if the cash in circulation was only 20 billion, it is unlikely that our system B was able to lend $ 30 billion. He would have to "refinance" with the Central Bank, BC system, asking from cash, either directly (money creation CO) or through an issue of central bank money. In France, currently (January 2010), the Central Bank lends to 1%, and commercial banks-lending at a rate ranging between 4% and 18%, there is room ...
One last point, the "reasoning" H. Creutz argument to justify the "anti-creationist" is based (see "The Syndrome of money ", p.11 and p.24) on the following syllogism. When Eusebius
lends money to his friend Casimir, the 200 euros that Eusebius lent Casimir no longer available for Eusebius: there was no money creation. So
(I emphasize so), it's the same when the bank Duchmol will lend money (always the semantic ambiguity between money, currency, because it is never really clarified if "currency" means " cash "or something else) to its customer Helmut.
is certainly less subtle than in P. Jorion, even if the book Helmut Creutz is also packed with interesting data, but found out this "great" principle: the conservation of quantities. Since it is stated that these are quantities of cash, cash, "cash" is a tautology without interest. The trick is not to specify what we mean. Good
critical reading, BL
** I wrote 3 billion in an initial version, thank you to the commentator who told me this error (it is true that a 1% rate is so rare - ))
