currency, its role, its origin, its dysfunctions.
This post will consist of three parts: the basic vocabulary, the origin and role of money, mistakes to his "good use"
The "currency" as any human creation can be both good and bad. Before we look at the qualities that "should" have a currency, we will first give some definitions. The vocabulary
monetary
Everyone uses in his everyday life, in one form or another, " payment " serving all market exchanges of goods and services: when it does not pay a bill, the amount is known in advance, will be the traditional expression: "How I owe you? "(Meaning" to resolve what I just buy ").
Nowadays, how to resolve this as well due to free themselves of debt - immediate or more distant - essentially takes two forms: "species" or "other."
The " species," or " fiat money", that Anglo-Saxons call "currency" are made up of notes and coins.
The other form of payment is called bank money "and is met by the use of a checkbook, bank card, or a transfer order.
The "species" are also called hand currency (coin pocket in Canada), since it passes from hand to hand (or pocket to another).
The use of "money", also known as book currency in Canada is best served by transferring the sum involved a bank account to another. When
bank accounts involve businesses or individuals, it is called bank money "bank" so is it the account opened by PSA with the BNP, or the account opened by Mr Smith with Societe Generale.
When bank accounts are those opened (necessarily) by commercial banks (or second-tier banks) with the Central Bank (or prime bank), it is called bank money "central" : thus account for opened by Crédit Agricole from the ECB (European Central Bank)
The currency used as payment by companies or individuals, whether in cash or bank money (bank) is called simply "money" or "money money" ("money" in Anglo-Saxon), or, if should be more explicit and precise measure of money as M1.
The monetary base, or base money, is sometimes symbolized by "M0". It consists of both cash flow and accounts that financial institutions are required to be opened with the central bank. Paper money, which constitutes the bulk of "fiat money" (the coins, or coins, representing less than 1% of total currency in circulation) is issued by the central bank: in Europe by the ECB. The monetary base is also used por exchanges between banks, when the net balance of interbank compensation claims it. Thus, if the account transfers to the BNP Societe Generale are more important on any given day, as in the other direction, the balance can not be settled in central bank money.
In summary, there are two kinds of currency :
currency 'central', which takes two forms, as "trustee" - the species, and the entry form (the accounts that financial institutions, including banks, are required to have with the Central Bank, said Senior)
deposit money banks (which appears on the accounts of individuals and businesses with commercial banks, also known as second-tier banks)
To fix ideas, in the euro area, the Central currency (M0) was in November 2009 of about 1.1 trillion (750 billion in cash). The M1 money was 4.462 trillion, the ratio M1/espèces , or "money multiplier" is 5.95 of the lever "book money (M1 fewer species) on species' is therefore 4.95.
M1/espèces ratio is often considered an expression of " monetary power" of banks.
The origin of the currency and money creation:
contemporary banks play two roles in managing the currency.
They serve first as an intermediary when they simply manage the existing currency, in an accounting role cash flows.
They also have a role of "money creation", when granting new Credits: sometimes we talk about this -currency debt . Let us clarify this second role, that raises the most questions. If
Dupont borrows a certain sum, 20 000 euros for finance, for example, buying a new car, instead of having these 20 000 to the dealer concerned, he will have the money to his bank. But Smith can also borrow EUR 50 000 for starting a business, and finance and its future investments in hardware, while paying a certain fee, while waiting to sell future products or services.
In both cases, Smith will sign an acknowledgment of debt Against a certain amount of money available to him, an amount that will be found initially in its bank account, also known as, unfortunately, demand deposit, or DAV.
This "deposit" does not correspond to any real deposit or its part or on the part of the bank, but a simple expenditure authority created by the bank concerned.
Since, in general, the loans granted (and created) are not converted into "cash", but are used as a scriptural currency "account", which circulates a bank account to another, banks are not really obliged to keep a "ton" of species. We will revisit this point later.
Let's just say that banks, for regulatory reasons or as a precaution, seek to maintain a certain ratio - or monetary lever - between what they lend "ex nihilo" and the species they have in deposit accounts equity, or on account of their clients. Historically, since September 1997, this lever has varied in the Euro zone between 3.92 and 8.35 (February 2002) to oscillate from one year between 4.80 and 5.10 (4.95 in November 2009). This lever
Monetary almost 5 means concretely that deposit money banks is currently about five times more abundant than the cash in circulation .
It also means that if each required to empty his bank account, the DAV, demanding that the withdrawal is made in cash, it would obviously be impossible for banks to do so. But as 95% of the value of trade exchanges is done using the deposit money bank, it would really exceptional for such a "cash run" takes place.
To understand how commercial banks were able to obtain such authority, the create, within certain limits, a currency considered almost as good, and often much more convenient , the kind issued by the Central Bank, we will do a brief history.
A little history: The first banks
"modern" - some based there are nearly 4 centuries - were formed from deposits of gold (or other precious metals) deposits to them entrusted by applicants who would not bother with this metal during their travels.
Thus, against the deposit of a certain quantity of gold, the banker Goldsmith gave his filing, Luke, a receipt stating the amount received on deposit. This receipt could "fly" and used to recover the same amount of gold deposited with a colleague Rockfailer at the other end of the country by another applicant.
As it was a receipt that could be countersigned by Luke, and be entrusted to John, this receipt "bearer" could serve to John to get him also that gold is at Goldsmith is among Rockfailer. The exchange between Luke and John may be made during a transaction, received payment method can be regarded as money.
Especially since this deposit receipt were 2 other qualities, which typically sought in a currency: it is a unit of account or "standard value" (hence the term "standard gold ") is also a reserve value.
From the moment these receipts began to pass from hand to hand and being used as means of payment, bankers have found they had rarely "draw" on their gold stocks, and that the real "Movements or" not concerned, on average between 5 and 10% of the total quantity of gold and stored.
bankers, so that their gold - or rather gold from their depositors - not "sleep" as well, began to make something other than receipts from applicants: it was the first "banknotes" ancestors of the bank money.
For these "pieces of paper" - which were based on more than a game of "real gold" - the bank Goldsmith stated that his client Bruce could have a certain amount of gold, to honor any commitment Goldsmith withdrawal not exceeding this amount. Thus, with a stock of gold to one million dollars, the bank could lend Goldsmith 5, 10 sometimes 20 times this stock, banking on the fact that the banknotes issued longer serve as means of payment as a means bank withdrawal.
legal limits, economic and ethical operation of the current monetary.
Can we call these scam loans, as banks, they are from 2 or 3 centuries or the present time, lend money they do not.
On a personal point of view, it is certain that a particular client, as important it is, is not likely to bankrupt a particular bank - even if, in a novel by Alexandre Dumas, The Count of Monte Cristo had managed to ruin the banker Danglars that way.
On a collective, a purely ethical standpoint, he is sure this is a blatant scam , since the community can not, generally, all suddenly convert bank money in cash. From an economic standpoint, it is more debatable, it depends of course on the use of loans and the interest rates offered to the borrowers. It 'important to remember that money it is scriptural or "trustee" has value only if there is concrete in front of wealth, goods and services that money can buy. If nobody does, the currency has no value, and having money "in reserve" will be meaningless. From a legal standpoint, this power is perfectly legal.
banks and bankers should take into consideration an economic obligation, if not moral, if their loans are used for common good and development of the economy, we can "forget" the fact that their loans' s akin to a scam, accepted or granted by regulators currencies, the Central Bank itself is meant to serve the community.
Otherwise, the practices of banks are more like the cavalry "to Madoff" or "Fonzi **" and should be punished as such.
Before discussing possible malfunctions money, this is occasional, probable, even certain, let us on the "formal" that exists between the quantity of bank money issued by commercial banks, and the amount of currency 'central "Issued by the monetary authorities, the Central Bank.
Central banks (BC), first floor of the pyramid money issue, that is created in two forms, the monetary base, or base money (see: http://www.skyminds.net/economie -et-sociologie/les-activites-economiques-et-leur-cadre-social/le-financement-de-leconomie /:
- a) cash, only to be legal tender, that money that banks prefer to receive only give (since their leverage of money creation, their monetary power, depends in part): the image is that of "printing money".
-b) scriptural base money, or electronic, that only exists in the computer files of the BC and assigned to the accounts of financial institutions. These accounts are part of what we call reserve requirements of commercial banks (see article 19.1 of the Statute of the ESCB). The reserve ratio is set at 2% for the euro area against 10 to 12% currently in China.
The scriptural money creation, which is sometimes shown as " liquidity" (in reverse, the destruction of monetary base is a "liquidity absorbing" by Central Bank) is as follows.
BC buys securities (like bonds or Treasury bills) using the central bank money, crediting much of the acquiring banks, improving bank liquidity. Conversely if the central bank wants to limit bank liquidity - and therefore the "monetary power" of commercial banks - it sells securities to banks in order to perform a drain on their reserves of money.
Now suppose that Societe Generale decided to grant 100 million euros in total to upgrade one of its refineries. If the Company General has already reached its required reserve ratio of 2%, it will - or should, because it is not always so strict - to grant the loan, to "refinance" with the Central Bank (or from one of his fellow bankers) of 2 million in "reserve money".
The total money supply will have increased by 100 million euros (if BC has occurred, it will be an increase of 98 million deposit money bank and $ 2 million base money: otherwise, if the company s General ' is re-financed on the interbank market, the 100 million will be only the bank money transfer).
Other rules or obligations 'prudential' limit the monetary power of banks
Banks must also comply with more or less rigor, other ratios: liquidity ratio - to avoid the "cash run" that is to say, if too many customers to withdraw cash at the same time - the solvency ratio (measuring the outstanding loans, that is to say the amount of loans, relative to their capital )
Bale agreements prohibit banks are expected to have a solvency ratio, or "tier" less than 8% (that is to say that the outstanding loans should not be more than 12.5 higher than equity). The BNP is far beyond these "rules", since at 31 December 2009, its total debt amounted to 1977 billion - exceeds the total GDP of Fance ... - Or 24.6 times the amount of capital which amounted to 80 billion euros (4.1% of total debt).
Deficiencies of such a system are numerous: they are mainly based on the choices that can make or not make the commercial banks by providing their credit, and opportunities and the desire to control the Central Bank vis-à-vis commercial banks.
banks unwilling to lend to firms or persons insolvent or whose debt will be paid by creditworthy entities. In fact, if the interest rate that drives hoped lending by banks, and even if the loans are made "from scratch", where a borrower is declared insolvent, the claim is not honored - if it is recognized such, will reduce the "low balance", that is to say, the capital of the bank, and thus will impact the ratio of the Resources Required said bank, and, more indirectly, its liquidity ratio: unless, of course, trying out the bad loans from its balance sheet before it needs to "accountability".
scriptural money creation by banks, if it exists, is not without limits. When the economic environment is relatively favorable when there is no major crises, it also does not really affect this power of creation. Thus no one really protested when, in 1973, the state debts with commercial banks have become producers of interest to them : Perhaps because the dominant economic thinking argued that if the state had to pay for debt, it think twice before considering any budget deficit.
Worse yet, few people at the time, protested against the adoption in 1992 of the Maastricht Treaty, which prohibits, inter alia, a state of the eurozone to refinance themselves directly with Central Bank: a montage where bizarre and very costly for a state that wants to borrow. The ECB lends
currently less than 1% for commercial banks, which will lend themselves state or government to 4 or 5%. When you think that if France, since 1973, had borrowed at rates "ethics" - that is to say, the growth rate adjusted for inflation - government debt is only half that it is.
If the state had borrowed without interest, his debt had been reduced to zero in late 2007. In fact, all taxes on income is the same order of magnitude as what France pays as interest on commercial banks.
In times of crisis, especially when we know that since 2007-2008 the original the current crisis is both a financial and banking - financial speculation on stocks, bonds and derivatives and the securitization of bad loans, focusing mainly on real estate market - the relative impunity enjoyed by the banks may be questioned.
It is then increasingly tempted to question the true value of banks. In fact, in a crisis of under-production and rising unemployment, if the currency is still essential to the functioning of a modern economy, the fact that monetary mechanisms are largely in the hands of banks, which therefore have the power exorbitant guide decisions by providing industrial and commercial or not new money is increasingly questioned.
Faced with this power that may appear unfair, even outrageous, two extremes are possible: the denial of one side or the search for solutions more or less "revolutionary" leading to a deep currency reform.
Denial will result in the desperate attempt of some to deny the obvious - that the bank money does exist and is used in 95% of trade - by dismissing as foolish or stupid simple idea of a money creation by commercial banks: hence the impossibility in this case to seek a "bank" to the current crisis, and therefore the choice, either intentionally or not, to guide the search for solutions to other ways banking supervision.
Among those who recognize the power "creationist" banks, and want to limit or even remove, some argue the group's proposals " 100% money , following Allais. The currency
exist only in its central form (cash or "cashless") and that would be emitted by the central bank, the Central Bank.
This solution and others - including those of social credit, the credit unions, money or stamped "slush" will be described in future posts.
It is clear that in the current context where there is both an unmet need, spare production capacity, and therefore a real production of real wealth far below potential output, the currency, which is justified really - and that has real value - that in relation to these riches, not playing its role effectively Economic .
be noted that in the euro area, money M1 increased by 12.5% in 2009, while GDP has remained stable, and that credit to the economy have not changed (net: zero) . Where did this new currency, what new "bubble" should we expect, if nothing is done?
BL
** Thanks to the commentator who noticed my slip, noting that it was Ponzi, not Fonzi, we had this scam: I retain, however, slip through honesty and also because the commentary is fun.
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