1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/13586/is-our-money-based-on-debt-2/

Is Our Money Based on Debt?

August 16, 2010 by

The Fed creates new dollars out of thin air and then lends them to the US Treasury. This loan out of nothing is then itself the source of the private banks’ ability to create money out of debt. FULL ARTICLE by Robert Murphy

{ 123 comments }

DD5 August 16, 2010 at 9:00 am

“Every dollar of the monetary base (or “narrow money” or “high-powered money”) comes into existence with a one-to-one increase in the public debt, collectively owed by the taxpayers. ”

But this quote is false since many of the Fed notes come into existence NOT buy just buying new public debt, but by buying anything else; already existing bonds, mortgage securities, toxic assets, etc…. In fact, isn’t it true that most of the recently new money created by the Fed came into existence not by just lending to the Treasury, but by buying other things. Thus, our monetary base is not all based on debt.

gurnsprings August 16, 2010 at 9:44 am

“…already existing bonds, mortgage securities, toxic assets, etc….”

Aren’t all the items you cited debts?

DD5 August 16, 2010 at 10:02 am

Yes, but they are already preexisting IOUs. When the IOU is paid off, the new money used to purchase that preexisting IOU doesn’t contract. Only that part of the money supply that was originally created to create the loan would contract. It’s like buying a chair or a table with newly created money. In fact, the Fed has the legal power to buy anything; chairs, cars, etc….

Matthew Swaringen August 16, 2010 at 2:53 pm

He did say “typical” not “always.”

Nick August 16, 2010 at 10:02 am

However, the scenario you give is wrong.

If there is a deposit, then the bank still needs capital in order to lend the money on. ie. Gearing is limited to a multiple of shareholder’s capital.

In your example you’ve ignored this limit on fractional reserves. ie. There are no reserves in your example.

Tut tut.

Matthew Swaringen August 16, 2010 at 2:52 pm

Notice that the loan was only 900$? Doesn’t that imply a 10% reserve?

James W. McGillivray August 23, 2010 at 8:21 am

Yes. It does imply a 10% reserve. But the 2 transactions are separate. Billie’s deposit is on the books of the bank as a “deposit liability”. It endures as such regardless or what the bank loans to Sally. The Bank could loan a million to Sally without affecting it’s ‘deposit liability to Billie.

When the Government borrows from the Fed it really only engages in this same sort of fiction, which makes the bankers richer and more powerful and the rest of society poorer and weaker in comparison.

Steve O August 16, 2010 at 10:02 am

The example doesn’t include what happens to the money spent by Sally in buying her supplies. That money still exits in the accounts of a bank that handles Home Depot or whatever store sold the supplies. Therefore, I don’t see the money supply shrinking unless loans go into default and banks must write-off assets. What am I missing?

Tiberyus August 16, 2010 at 12:03 pm

The money that was paid to Sally for her products is now no longer in the account of her client.

Frank August 16, 2010 at 10:05 am

Further to DDS, and per Rothbard, the Fed could buy my desk if it wanted to. The looming issue for me is what happens to the money supply if Sally defaults on her loan. Presumably her checking account balance is now showing up in the accounts of others, so no contraction of the money supply there unless the bank also folds and takes down poor Billy. But then there’s the issue of the FDIC stepping in to help Billy. Clearly no change in money supply if the FDIC borrows from the public, so presumably the Fed would have to create new reserves if it wanted to avoid a contraction of the money supply in the wake of defaults, which I presume they’re setting up for now…

Dave August 16, 2010 at 10:22 am

The article demonstrates why the central banks, and governments, are fearfull of a gold standard.

John Cashin August 16, 2010 at 10:42 am

The Federal Reserve Act of December 23rd, 1913 is unconstitutional on it’s face and was only passed with 3 Congressmen present out of the entire House and Senate members who had gone to travel home across the nation for holidays! Further read “The Money Trust” by Senator Charles A. Lindberg Sr of New Jersey who came back in January 1914 to “discover” such a trecherous Act had passed illegally!

Martin Sibileau August 16, 2010 at 10:52 am

As a student, I remember the time when Prof. José Maria Fanelli, Univ. de Buenos Aires, suggested something very similar: if there were no government debt, the market would have no benchmark rate…As I was very young and ignorant, though not naive, I decided I would ask someone else about that comment. I had scheduled a meeting with Dr. Julio H. Olivera (refer Olivera-Tanzi effect), already a very old man (this took place about 20 yrs ago) and took the opportunity to ask for his comments on that proposition. Interestingly enough, he confessed he had once also posted the same question to John Hicks (creator of the IS-LM model), with whom he had maintained a fluid correspondence. Prof. Hicks’ answer was: “The merchant makes the market”.I thought that was an enlightening answer…

Mike Sproul August 16, 2010 at 11:32 am

So what? The Fed could issue each dollar in exchange for a square foot of land, or it could issue each dollar in exchange for someone’s promise to deliver a square foot of land, or for a bond that is collateralized by a square foot of land. Money can be based on pretty much anything of value. One thing it is not based upon is “thin air”.

Beefcake the Mighty August 16, 2010 at 11:43 am

Err, the Fed does not “issue” dollars, it increases (or decreases) the reserves available to the banking system as a whole. Perhaps you confuse the Fed with the Treasury?

Bob Kaercher August 16, 2010 at 12:01 pm

Beefcake: When I request $200 in cash from my checking account at the ATM, the bank gives me $200 in greenbacks in exchange for $200 in my checking deposits. My bank must purchase the greenbacks from the Fed, who then debits my bank’s Fed account by $200. It’s the reserves that make the dollars possible, no?

You seem to be hung up on the technically correct usage of the term “issue,” about which you may be technically correct insofar as the point of origin of those dollars, but it is the Fed that sells the greenbacks to the commercial bank.

Beefcake the Mighty August 16, 2010 at 7:52 pm

I don’t think this is nit-picking. As a poster noted below, proper terminology is especially important in this debate; the effectiveness of an otherwise sound argument is greatly hampered by imprecise use of terms (something I’ll plead guilty to as well).

However, the specific point here is that Mike Sproul’s dog-and-pony show centers around his belief that if banks issue notes “backed” by assets of “equal value,” the effect is non-inflationary. There is first the point that this value, which he expresses in terms of monetary units, obviously cannot be independent of prevailing monetary conditions. However, there is another point, and this concerns the precise nature of our monetary system. The Fed does not “issue” anything; it monetizes Federal Govt debt, which increases the reserves of the banking system as a whole. Now, with these reserves individual banks are able to increase the loans they make to the public. And in turn, the banks can increase demand for loans by lowering the interest rate they charge on these loans. In other words, they can affect the willingness of the public to bring forth the very collateral that Mike Sproul believes “backs” those loans. Demand is not independent of supply here, but like the Monetary Equilibrium theorists who claim to reject the Real Bills Doctrine, Sproul believes these increased isssues by the banks are driven by the demand side, instead of on the supply side.

Eric August 16, 2010 at 1:52 pm

Mike:

Recently, the FED has created about $1 trillion dollars in currency, which they used to buy the so called “toxic assets”. It is one thing to say that money is not based on “thin air” but it’s another thing to say that “toxic assets” paid for by the FED at FULL COST (or the amount of the loan) is the same as saying the FED simply created money that is fully backed by some valuable asset.

If the asset the FED buys has a true worth of say, 1 cent on the dollar, yet the FED pays a full dollar, then do you still feel there is no hanky panky going on?

The same thing occurs when the FED buys government debt. It’s true that the new dollars are backed by that debt – but what happens if that debt is not repaid, ever? And so to pay off the current debt, the government borrows more debt. Isn’t this the same as a ponzi scheme?

Suppose I buy a garbage dump thinking there’s some valuable items hidden in the junk. I then use this as collateral on a loan. The loan is created for me at a bank and they back it up by the garbage. It may turn out that there’s some gold in the garbage, or more likely there’s nothing of value. So the money for my loan is backed by garbage.

I suppose your rebuttal would be that banks choose carefully what they use for collateral. But the last few years seem to prove that this is not always the case.

In these days of CO2 scares, perhaps thin air is thought to be good collateral.

james b. longacre October 3, 2010 at 4:51 am

Recently, the FED has created about $1 trillion dollars in currency, ”

can you describe this currency??? was it paper dollars and coin or something else or a mix???

Matthew Swaringen August 16, 2010 at 2:58 pm

Mike, you aren’t wrong about it not being based on “thin air.” Rather, it’s based on prior real wealth in the economy. It sucks a small portion of wealth by driving up prices as newly created dollars are used.

It’s a legalized counterfeit operation.

james b. longacre February 2, 2011 at 3:01 am

what is a legalized counterfeit operation??

i dotn see how the fed counterfeits its own product. woulndt a blender maker then be counterfeitin its first blender??

Tiberyus August 16, 2010 at 12:14 pm

An under-stressed issue is that there is always interest paid for the debts that the money is issued against. So, just like in the case of commercial bank having some left-over money when they debited her account, the same happens with the central bank. And because it’s the sole creator of money, there is always more debt than dollars in reserves, due to debts growing in time and reserves staying the same (or, at least, growing at a slower rate). So, when the money base contracts, the share of money base lost is always higher than the share of debts repaired (compared to their totals). Which, furthermore makes the debt/money ratio even lower, further accelerating the process. This ultimately leads to a very small money base compared to enormous debt that has piled up, with no possible chance to ever repay the debt without forgoing whatever the collateral was used for debts (government property, houses, etc.)
Ideas?

Todd Marshall August 16, 2010 at 12:46 pm

Also an understressed issue is DEFAULTs. While it is true that INTEREST charged leaves less “money” in circulation than is owed, DEFAULTs leave more “money” in circulation than is owed. A properly managed medium of exchange assures that INTEREST equal DEFAULTs and thus maintains INFLATION at zero.

Todd Marshall
Plantersville, TX

Tiberyus August 16, 2010 at 1:00 pm

Assuming US government isn’t going to default on it’s bonds any time soon, what then?

Todd Marshall August 16, 2010 at 1:41 pm

The US government and its accomplice the Fed are very bad managers of the medium of exchange. The US government promises to make all kinds of trades and never completes them (the only way they can complete them is through tax collections which are never sufficient). The Fed is just the co-conspirator. They pretend to be the exchange medium manager. They pretend to monitor INFLATION and diddle their INTEREST knob accordingly.

At first their actions appear guided … then arbitrary … then ineffectual (as they are now). But over time you see it is very profitable for them to charge INTEREST way below their DEFAULT experience (actually they don’t know their DEFAULT experience) and then they jack INTEREST up making the in-process trades difficult to complete. They then mop up the DEFAULTS at pennies on the dollar paying with INFLATION (historically 4%/year since their inception).

It’s an insidious racket.

james b. longacre August 16, 2010 at 5:09 pm

The US government and its accomplice the Fed are very bad managers of the medium of exchange. …..

has their managing led to succesful things?? never a bnak run again??? money that is basically costless so it can quickly go into shoring upo money mistakes preventing further calamity?? does the currency now bring goods to market faster than getting new gold or silver+plus notes for gold and silover ever could??

how do you know what goods would have gone up in prices in relation to wages in a bad way with another type of money/currency???

Todd Marshall August 17, 2010 at 9:34 am

“has their managing led to succesful things?” Yes, we have a medium of exchange which is more efficient than barter. However, we didn’t need the Fed (a small collection of private banks) for that. The Treasury department could have done it directly.

“never a bank run again???” Bank runs are caused by capitalism that says capital must exist before it can turned into (or back) exchange media used in trades. If the exchange media is known to be “promises to complete trades”, no deposited money is ever at risk and thus there are no bank runs.

“money that is basically costless so it can quickly go into shoring up money mistakes preventing further calamity?? ” The money is far from costless. Since inception of the Fed we have had about 4%/year INFLATION. That is a cost … a very high cost … paid by all users of the exchange media … not just the bad actors. Further, there is “arbitrary” INTEREST collection. Have perfect credit and never miss a payment (no DEFAULT history) and you still pay double for a house over 30 years.

“does the currency now bring goods to market faster than getting new gold or silver+plus notes for gold and silver ever could??” Yes. But gold and silver backing the media of exchange has never been a good solution to the DEFAULT problem. 1). There is the demand for the shiny stuff itself which distorts its value in trade … especially over long periods of time. And 2). There’s not enough (or ever the right amount) of the stuff. Take gold. We can’t back trades (exchange media in circulation) with gold. There’s only 1 ounce per trader … and a new ounce can be produced for about $1,000. I don’t know a single person who doesn’t have trades in progress exceeding $1,000.

One thing is clear. The management of a medium of exchange is not understood by one single economist. If it were, we wouldn’t have these ridiculously complicated solutions to a really simple problem.

james b. longacre August 16, 2010 at 5:10 pm

how would that happen??

james b. longacre February 2, 2011 at 3:05 am

If the money is known to be “promises to complete trades”, no deposited money is ever at risk and thus there are no bank runs.

is that true to??

james b. longacre February 2, 2011 at 3:09 am

were previous gold standards then and accompanying bank runs(if what i read was true?) due to fraudulent promises on the notes??

james b. longacre February 2, 2011 at 3:15 am

There is the demand for the shiny stuff itself which distorts its value in trade … especially over long periods of time.

how do you distort value if its something that people value for somethign??

But gold and silver backing the media of exchange has never been a good solution to the DEFAULT problem………..

so what backing the media is a good solution to the default problem?? isnt the backing not an issue when it comes to defaults..but poor lendign strategy???

Todd Marshall August 16, 2010 at 12:34 pm

For what is the typical asset that the Fed buys, when it expands the monetary base? The answer is bonds issued by the US Treasury. This is a very complicated process that I explain here. But the gist of it is this: under normal circumstances, the Fed creates new dollars out of thin air and then lends them to the US Treasury. The real way to look at any medium of exchange is from the viewpoint of trade. Exchange media is just a substitute for physical barter. In the end, when the trade is completed, the barter has been accomplished and the exchange media is extinguished.The fact that the exchange media is created out of thin air has no effect on demand for goods and thus their price. The demand for the goods comes about before the exchange media is created … the exchange media just facilitates the trade.And the fact that the exchange media is extinguished at the end of the trade also has no effect on the demand for goods and thus their price. As noted above, the trading decision is made before the media is needed (and once needed, the media is readily available).If some other traders choose to enter into a transaction, the fact that no exchange media is circulating has no effect on their desire or ability to complete the trade. The only thing that affects the trade is “what they have to trade” and “what they want in return”. This all becomes very simple to see when you view the exchange media a “promises to complete a trade” rather than something “borrowed from someone else” or something “created out of thin air”.Todd Marshall Plantersville, TX

Inquisitor August 16, 2010 at 12:44 pm

And what is it the Fed will offer to “complete” the trade? Your post borders on being mythological… Increase the money supply without corresponding increases to goods and prices will increase.

Todd Marshall August 16, 2010 at 12:50 pm

The manager of the medium of exchange merely facilitates (guarantees) the trade. Such guarantees are not needed in straight barter. How does the medium manager stand behind this guarantee? If one trader does not complete the bargain, the medium manager completes it for him. The medium manager monitors these DEFAULTS and collects INTEREST to balance them. The governing relation is:

DEFAULT = INTEREST + INFLATION

The object is to have INFLATION be zero at all times.

Eric August 16, 2010 at 2:43 pm

Todd: “In the end, when the trade is completed, the barter has been accomplished and the exchange media is extinguished.”

But this is not the case with a medium of exchange if the media is something of value. It is retained and is not used up.

If the media you refer to is created by a bank, then it lasts until the loan is repaid – not only until the funds are spent by the borrower. Over time, the amount of loans outstanding has historically risen. I.E. before loans are repaid, more loans are made – in ever increasing amounts. Thus the total stock of loaned money increases and only very rarely decreases (and usually for a short time only).

All the newly loaned money looks identical to money already in existence. Thus prices increase over time. This explains why penny candy once sold by the penny and no longer does.

Todd Marshall August 16, 2010 at 3:16 pm

All you are saying is that “over time, the number of trades in progress has historically risen”. And this is naturally expected as the number of traders has historically risen. However, the “total stock of money” should always equal the “total promises to complete trades”. To the extent that it does not, INFLATION or DEFLATION arise.

You are sort of correct: “All newly loaned money looks identical to money already in existence”. This is ideally what we want. Unfortunately we have never really experienced this because INTEREST collections have never equaled DEFAULTS (particularly by the Federal Government) and thus we have always had INFLATION. With INFLATION, new traders have an advantage over earlier traders.

It does not explain why “candy once sold by the penny no longer does.” That is explained by the mismanagement of the medium of exchange where INFLATION was not held at zero by collecting INTEREST equal to DEFAULTS. And the principle defaulter is the government. They never complete their trades. They just roll them over and start new ones. Only a small amount of those trades are concluded by tax collections. Some of the DEFAULTs are mopped up by INTEREST collections charged by the Fed on the US Government … but that is just part of the scam.

Tiberyus August 16, 2010 at 3:00 pm

Fed balance sheet:

Loans Outstanding | Money in the market
| Shareholder value (Accrued profit)

Default – decrease in the amount of loans (because the original borrower refuses to pay for them)
Interest – decrease in the amount of money (money paid with no repayment on the loan)
Inflation – equal increase in both (printing new money to make new loans)

Usually, interest is accompanied by inflation, as interest isn’t repaid – instead new loans are made with money given back immediately.

So, any difference between defaults on the part of ORIGINAL borrower (the assets that Fed is holding), which are rare, if non-existant, and interest it gets against the loans made, is just a share-holder value (Federal reserve bank is a private institution, remember) – claims that can be made against any asset (houses, government property, commodities, etc.).

Tiberyus August 16, 2010 at 3:18 pm

Fed balance sheet (fixed):
Loans Outstanding | Money in the market
—————————————– | Shareholder value (Accrued profit)

Todd Marshall August 16, 2010 at 3:22 pm

DEFAULT: Failed promise to complete a trade and return media of exchange.
INTEREST: Media of exchange collected from a trading transaction to absorb earlier trading transaction DEFAULTS.
INFLATION: Measure of imbalance between DEFAULT experience and INTEREST collections. If DEFAULTS exceed INTEREST we have INFLATION (media in circulation loses value). With the reverse we have DEFLATION (media in circulation increases in value). Proper management holds INFLATION at zero over all time and space.

The Fed holds no “net assets”. They started with nothing and have paid their member banks everything they have confiscated in the form of INTEREST collections. The Fed is “our” manager of exchange medium … but they cheat … and the 4% annual INFLATION we have experienced over their existence is a measure of their theft.

Tiberyus August 16, 2010 at 3:32 pm

The amount of money available in circulation DIRECTLY AFFECTS prices.
When more loans are made ( = when more money is issued), prices go up.
Keynesian economists call rising prices “inflation”, while Austrians call issuing new money “inflation”.

What kind of messed up definition for “inflation” are YOU using?

james b. longacre August 16, 2010 at 4:48 pm

i thought hayek called any increase in the money supply inflation…regardless of goods and services.

james b. longacre February 2, 2011 at 3:21 pm

but they cheat … and the 4% annual INFLATION we have experienced over their existence is a measure of their theft.

did the people who received the fed loans get something that they couldnt have otherwise??? immediate funds/currency/dollars and were able to create a profit generating enterpise regardless of interest??

james b. longacre February 2, 2011 at 3:24 pm

does the fed lend??? if they do lend are you saying or asking ….’why do they lend with interest if they create the currency-dollars themselves???

Inquisitor August 16, 2010 at 5:20 pm

WHat world do you live in in which it is in fact zero?

Todd Marshall August 16, 2010 at 6:36 pm

No such world exists because it’s not in the interest of the manipulators to have zero inflation. But it is possible to have zero inflation. It is possible to know you have zero inflation even without measuring it directly.

It is very difficult to directly measure inflation because an imbalance of supply and demand for an item; or a collection of items; for the economy as a whole; or for the so-called “backing of the media of exchange” can “look like inflation”. However, DEFAULTs and INTEREST collections are both directly and precisely knowable. And from the relation governing exchange medium management (INFLATION = DEFAULT – INTEREST) it is possible to maintain INFLATION at zero. Just measure DEFAULTs and make INTEREST collections to equal them … always keeping in mind that the media of exchange is “promises to complete trades”.

The steady 4%/year INFLATION rate we’ve seen over the last 100 years (roughly measured by the price of gold) is not about supply and demand imbalance. It’s about DEFAULT/INTEREST imbalance. And the principal DEFAULTer is the Federal Government which funds its adventures using INFLATION while coming close to funding the Fed (the INTEREST the Fed charges them) with tax collections.

It’s an amazing scam. The world would be a very different (and better) place without that scam operating.

james b. longacre August 16, 2010 at 7:26 pm

The steady 4%/year INFLATION rate we’ve seen over the last 100 years (roughly measured by the price of gold) is not about supply and demand imbalance. It’s about DEFAULT/INTEREST imbalance.

why is that an imbalance??

james b. longacre February 2, 2011 at 3:32 pm

The steady 4%/year INFLATION rate we’ve seen over the last 100 years……..when economagic.com com show m1 in 1959 at 230 billion and m1 at in 2011 at 2 trilion or so that isnt actually showing inflation??? but the price of gold is somehow??

james b. longacre February 2, 2011 at 3:17 pm

Exchange media is just a substitute for physical barter………

so why use media then? i think everyone knows that something is traded when money is spent on goods.

but there are different things happening when money is used to get a good rather than bartering a good for good. i thought it is the money aspect of trade is what most economists try to study, chart and understand. espicially the process of currency policies

Smack MacDougal August 16, 2010 at 2:36 pm

Unfortunately, Robert P. Murphy spreads false belief when he says that “… the commercial bank extended a $900 business loan to Sally, it created that money out of thin air.”

Sadly, the brilliant Murray N. Rothbard held the same false belief.

Because persons lack knowledge of commercial law, especially economists of all stripes and schools, and others who might have read some words on economics, persons lack understanding of commercial banking. Robert P. Murphy is no exception.

A banker is a trader whose business consists in buying money and debts by creating other debts. A banker BUYS money and SELLS credit. The depositor SELLS his or her money and BUYS credits. When a banker takes a deposit, that banker creates and issues credits payable on demand and in doing so, puts money already in circulation to greater efficiency.

Here’s where Austrian economists fail, and sadly Murray Rothbard. Bankers now own the money deposited with them, BY LAW. Depositors own a RIGHT OF ACTION against bankers to future money.

Yet, no money is getting conjured “from thin air”. Bankers OWN all money they lend. Bankers BUY money from depositors.

Another glaring mistake many make is how cash comes into circulation. When the average weekly demand to hold cash from bank tellers or ATM machines increases, the Federal Reserve PAYS the U.S. Treasury to mint notes and coins.

It is through increased demand for cash alone that money accretion arises. It’s the customers of banks who cause an increased sum of money in circulation and NOT Federal Reserve Bankers.

In short, economists of nearly all stripes do not get money, credit, banking, and commercial banking and sadly, this includes Austrian School economists who accept the false beliefs of Robert P. Murphy and Murray N. Rothbard.

J. Murray August 16, 2010 at 2:40 pm

Uh, how can banks buy the money? Buying indicates trading for something else. Banks have no assets for which to trade with. The cash only becomes bank property because of fiat law handed down by Congress. Further, it still fails to explain how a $1,000 cash deposit turns itself into a $10,000 asset with $10,000 in claims for cash when only $1,000 exist. Austrians and Rothbard are not wrong on the subject.

Smack MacDougal August 16, 2010 at 11:10 pm

Re-read my original post. Bankers BUY money with their credit. They sell debt to depositors.
This is basic economics and commercial law.

Contracts have estimated values in any future. Bankers record these estimated values as assets on books. All businesses do the same. This is basic accounting.

No conspiracy exists. Nothing nefarious is being done.

Again, too many economists of all stripes, and unfortunately Austrian School economists simply do not get money, credit, commercial credit and central banking. In short, they do not get economics, which is all relevant matters to men regarding wealth.

The Kid Salami August 17, 2010 at 3:59 am

Smack – are you suggesting that Jesus Huerta de Soto does not “get money, credit, commercial credit and central banking”?

You assert (sorry, say):

“Bankers don’t take in desposits. Bankers BUY deposits. Bank deposits are mutuums.”

de Soto goes into as much detail as any sentient being could want about the legal and contractual issues in this area in his book. This is old news around here. In the interests of an actual debate, why not tell us if you disagree with him and, if so, please tell us where he is confused?

Smack MacDougal August 17, 2010 at 11:14 am

@Kid Salami.

First, your clumsy misuse of rhetoric amuses. Your lame use of innuendo, trying to mislead others that I’ve attacked de Soto amuses. You mentioned his name. I have not.

Also, you resort to innuendo again, by suggesting that only are interested in actual debate and I am not.

Yet, it’s you who engage in veiled, ad hominem attacks. How lame.

Is de Soto your idol? Do you worship him? Who cares who he is?

If de Soto or anyone else on earth fails to see truth, that makes them wrong, stuck suffering from false beliefs.

Not one cent of money gets conjured from thin air in commercial banking. Anyone who believes so does not get money, credit, banking and central banking. Thus, those who do so do not get the basis of economics, and thus do not get economics itself.

Bankers buy money and debt and sell credit (debt). Bankers enter into innumerable commercial contracts. The essence of banking are these contracts.

The Kid Salami August 17, 2010 at 1:01 pm

I don’t really understand the first part of your post, I simply asked you a question. You can read into this on 10 levels if you want to, all I wanted was an answer – whether, on money, credit and banking, you agree with, disagree with or are unaware of the arguments of one Jesus Huerta de Soto.

I just wanted something concrete to debate – all you keep repeating is that no’one gets economics (but you it seems) and that “Bankers buy money and debt and sell credit “, like this statement is the end of the argument. You will not define your terms, meaning debate is impossible, so i thought maybe I’d try a different tack and find something concrete you disagree with.

If you want to actuallyn debate though, let’s go. When you say “Not one cent of money gets conjured from thin air in commercial banking.” – will you please define money so that we can apply this definition to the process of frb and see if it is true?

NB. it appears you don’t know his book. You say “Not one cent of money gets conjured from thin air in commercial banking. Anyone who believes so does not get money, credit, banking and central banking. Thus, those who do so do not get the basis of economics, and thus do not get economics itself.”

Mr de Soto (who is not my idol nor someone who I worship) uses the phrase “ex nihilo” regularly in his book to refer to creatino of money from thin air and therefore I would say that you are saying he “does not get economics itself”. I think this is absurd, and this is understating it greatly.

J. Murray August 17, 2010 at 5:21 am

I did read your post. They don’t have credit to offer. Credit means someone else saved to lend. What did banks save to lend out in the first place? Nothing. They have nothing. I don’t deposit my money for credit, I deposit it to keep it safe. The bank isn’t buying my money, I’m putting it there because it’s better than stuffing it in the mattress. I’m not even using credit. If that’s all that a bank does, I’d be better off extracting every cent of money out of that facility. Of course, that means they’d have to recall roughly $10 million in loans due to reserve requirements. The credit is made up. Only they’re allowed to pull that stunt because of arbitrary fiat.

Smack MacDougal August 17, 2010 at 11:05 am

J. Murray your false belief about credit is far removed from truth.

No one saves before a company offers 30-day or 60-day net terms. Simply, a company issues an invoice as evidence of a contract and voilà, instant credit without anyone saving. When Sears offers a store card to customers, Sears gives INSTANT CREDIT to customers without saving first happening.

Banking is no different. A banker is a merchant who buys money and other debt by selling debt. A banker can do so because he trades on his good name, the same as any other merchant who can buy inventory without first turning over cash.

In commercial banking, when you deposit money in a bank, you have SOLD your money to the banker. You buy bank credits. The banker SELLS you bank credits. The banker becomes indebted to you.

A contract gets created. This contract gets governed by banking laws. You gain a Right of Action against the banker to claim OTHER money in a future, which, of course, you might not get to recover if that banker fails.

Like most, you sell your money to a banker because you turn your money into capital. You’re seeking to earn a return, or you should.

As an aside, simply write or say “I read your post.” This “did read” business is unnecessary for English speakers.

J. Murray August 17, 2010 at 11:31 am

Rule 1 of the Internet – if you feel compulsion to correct grammar then your argument is bankrupt.

Smack MacDougal August 17, 2010 at 2:46 pm

Bwwaaah. Did you not see the phrase, as an aside?

Your response is typical of someone suffering from Cognitive Dissonance. You would rather defend your false beliefs and wrong acts than to change in the face of new facts, intelligence and truth.

My easy test proved it. You reacted as expected.

How you amuse.

Eric August 16, 2010 at 2:52 pm

You missed the point about fractional reserves. If the bank took in a deposit for a period of time, say for example, 1 year (where the depositor could NOT withdraw for a year), and then during that year lent out the deposit for a higher interest rate than it paid, it would NOT be engaging in fractional reserves.

However, if it tells the depositor that it can write a check at any time (even 5 minutes after making the deposit), and it STILL lends out the deposit (up to the reserve limit) to someone who won’t repay for a year, then the bank has created new money since it has to make good on two debts at the same time while it only has but the one deposit.

Smack MacDougal August 16, 2010 at 11:14 pm

I have missed nothing, yet you have missed it all, Eric.

Bankers don’t take in desposits. Bankers BUY deposits. Bank deposits are mutuums.

Checking accounts are not money. Checking accounts are contracts, legal obligations. Only banknotes and coins are money. All else are contracts.

Again, far too many people claiming to be economists or schooled in economics at the graduate level simply do not get economics. Because they lack knowing money, credit, commercial banking and central banking, they get suckered by many false beliefs.

The Kid Salami August 17, 2010 at 3:44 am

“Checking accounts are not money.”

Easy to make assertions (sorry, statements) like this when you won’t give us your working definition of what “money” is so we can work through your “theory” ourselves.

james b. longacre August 17, 2010 at 4:25 pm

does the govt produce money supply figures that include checking accounts??

is the non-money in checking accounts still counted in dollars…like in the money supply figures??

is it currency instead of money???

Matthew Swaringen August 16, 2010 at 3:06 pm

This sounds like a semantic argument. I don’t personally think that BUYS and SELLS make a lot of sense in the context you have used those terms.

BUYS implies the banker actively does something to get a deposit, but he doesn’t.

Smack MacDougal August 16, 2010 at 11:15 pm

Bankers don’t advertise, Matthew? Bankers don’t try to upsell existing customers with new products, Matthew?

J. Murray August 17, 2010 at 5:23 am

But when I deposit my $1,000 check that week, I’m not buying $1,000 of anything. It’s being put into a vault for safe keeping. They do try to sell me things like CDs and other goofy products, but I tell them to suck a lemon. I don’t buy anything but a protection service and that isn’t worth every penny of my pay.

Smack MacDougal August 17, 2010 at 11:21 am

First, your $1,000 check is NOT money. It’s evidence of a contract. That check represents debt owed by another.

When you deposit $1,000 check, you SELL that contract to a banker, who buys it. The banker does not put your check in a vault. The banker records the check on his books and sends the check to the ACH (automated clearing house), which resolves inter-banker obligation book entries.

JGiles August 17, 2010 at 11:47 am

You’re getting hung up on the word money. That doesn’t help anyone, especially not yourself.

Yes, banks don’t technically “create money”; they extend credit, through a series of contracts, which declare that they will pay a specified sum of money at some time in the future.However, there contracts are FUNCTIONALLY money; whatever you want to call them, they have an effect identical to money. As such, an extension of bank credit ACTS as an expansion of the money supply.

Whether or not the bankers “own”, “buy”, or “sell” the money they handle also makes no practical difference. The depositors still have a “right of action”, which is a claim on that money, which means that the banks freedom of action regarding their money is constricted by the contract they’ve entered into. And fractional reserve banking still removes the money that the depositors have a claim on.

So in short, all your semantic pedantry does not change any of the facts, Smack. You can call it “credit” or “money”, it makes no difference. You can say bankers “sell” or “lend” money, it makes no difference. And you certainly haven’t disproved anything. Why don’t you try making a logical argument next time?

Tiberyus August 16, 2010 at 3:25 pm

>> that banker creates and issues credits payable on demand
Which it wouldn’t be able to pay on demand if a number of people demanded it.

Smack MacDougal August 16, 2010 at 11:21 pm

Many businesses lack the ability to pay on demand if say, note holders demanded payment simultaneously.

If this is your beef, then you have a problem with the fundamental basis of 400 years of Anglo-Norman business culture.

JGiles August 17, 2010 at 11:53 am

“If this is your beef, then you have a problem with the fundamental basis of 400 years of Anglo-Norman business culture.”

Ding ding ding! Right in one! We DO have a problem with “Anglo-Norman business culture”, in fact. As you would know if you had bothered to read, hmm, anything on this site.

You might want to educate yourself a little before you make yourself look like even MORE of an idiot. Although that would honestly be difficult.

Smack MacDougal August 17, 2010 at 2:40 pm

You amuse, JGiles.

I’ve schooled you already on this. I taught about money vs credit and rights of action. Parroting my phrases only proves this.

Keep on amusing, parrot!

JGiles August 17, 2010 at 3:28 pm

. . .Yeah, you’re sad. As I mentioned above, you can call it “money” or “credit” or “phlegm” for all I care, all that matters is what it DOES. And what it does is act as money.

In addition, your response here has absolutely nothing to do with what I wrote. It’s obvious that you are too intellectually bankrupt to actually have a debate with.

Smack MacDougal August 17, 2010 at 11:30 pm

Saying so does not make it so. Name calling is a lame method of ad hominem attack JGiles. Surely, you can do better.

Besides, there is no debate to be had. Economists of the Austrian School suffer from false beliefs regarding money, credit, commercial banking and central banking. Thus, their conclusions, such as presented by Robert P. Murphy are false.

Facts remain. Bankers by money and debt by selling credits all backed by commercial law. That’s the essence of banking. Bankers increase their buying power — money and credit — by being shrewd in business, which is the same goal as all others in business for profit.

Mises was unoriginal in his Trade Cycle theory. Others before him wrote the theory before he did. Moreover, Mises ripped off others routinely.

This isn’t to say that excessive bank credit doesn’t lead to crisis. Merely, Mises does not deserve accolades for the theories of others.

james b. longacre August 17, 2010 at 4:27 pm

banks don’t technically “create money”; they extend credit,……….

is the credit that you say is extended counted in dollars….like money?? or currency??? is the creidt that you say is exended regulated in a way simialr to the currency/money/dollar??

james b. longacre August 16, 2010 at 4:54 pm

A banker BUYS money and SELLS credit. ………..

currently, is the credit counted in the same unit as the alleged money (is currency more accurate)? the dollar??

Yet, no money is getting conjured “from thin air”……………..

so when a bank gets a dollar-currency deposit do they lend that out and the depositor spends what???? dollar-credit??? dollar-currency-credits??? a ledger entry instead of a paper currency dollar??? is “something” extra created from thin air?

james b. longacre August 16, 2010 at 4:58 pm

if a number of people demanded it…………

demanded a paper dollar or current coin??? or a check from the bank???

james b. longacre August 16, 2010 at 5:03 pm

who prints new paper dollars and mints new coins???

is there another mechanism by which the federal reserve makes dollars that arent paper or metal???

The Kid Salami August 16, 2010 at 5:04 pm

“A banker is a trader whose business consists in buying money and debts by creating other debts….”

So says you. Before we can see if this and your other assertions make sense, let’s get straight what money is. When you say money, what do you mean? What definition can we work with?

Smack MacDougal August 16, 2010 at 11:36 pm

Kid Salami,

What incentive do I have to play along with you when you start off our interaction with something as childish as “so says you”?

Also, you have zero credibility. It’s laughable that you believe, falsely, of course, that you’re the board arbiter as to what assertions exist or not.

The Kid Salami August 17, 2010 at 3:41 am

Ok, so that’s a no then. Thought so.

hyp3rVigi1ant August 17, 2010 at 9:43 am

I think it’s quite obvious that if you were to look honestly at the comments on this page, you will find that it is you that has zero credibility amongst the rest of us here.

Smack MacDougal August 17, 2010 at 11:23 am

Who are you, hyp3rVigi1ant?

You’re the typical cult follower as you exhibit predictable behavior under group dynamics.

Right now, hyp3rVigi1ant, you’re trying to gain status within the group (cult) by attacking the outsider (me). It’s a safe play.

How you amuse, hyp3rVigi1ant.

JGiles August 17, 2010 at 11:51 am

And you, Smack, are a self-congratulatory asshole who apparently needs to come to an internet forum and insult strangers to make himself feel better.

If you want to have a debate, define your terms. If you just want to sneer, carry on, we’ll ignore you.

Matt H. August 29, 2010 at 10:28 pm

Smack MacDougal, I’d be interested in your explanation for why there is a need for the interbank lending market and why some banks finish the day short of their reserve requirements while others exceed it.

james b. longacre February 2, 2011 at 2:53 am

do they??

what are the reserve requirements??

can you describe the reserves…paper dollar bills??

Stephon February 1, 2011 at 10:54 pm

You’ve made a distinction without a difference, and then drawn a false conclusion. Regardless of the terms you wish to use to describe the scenario Bob Murphy has already described, you must realize that all newly created dollars must first come from the Fed, after which they can be either “bought from depositors in exchange for debt” or, without the first step, simply “extended as credit” (in the case that the Fed purchases the Treasury directly from a bank). Either way you phrase it, new money is created via the fractional reserve banking system.

However, semantics aside, you are wrong to insist that it is through “increased demand for cash alone that money accretion arises”; this is the same rubbish logic that Keynesians use to suggest that demand alone is what drives an economy. In fact, it is through “increased SUPPLY OF cash that money accretion arises,” which is so obvious as to be begging the question. I need to point no further than the “open market operations” in which the Fed buys Treasurys that lack sufficient demand from people holding existing dollars to keep the government from defaulting without an adequate alteration in its spending habits.

Lastly, to revisit your semantic quibbling about what money is and isn’t, M1, M2, etc. are referred to as such for a reason, because they count as money, are denominated as money, and affect prices and thus the value of money. Call it what you like, but the process described by Bob Murphy and the words he uses perfectly describe what you have nit-picked and from which you have drawn false conclusions.

james b. longacre February 2, 2011 at 2:45 am

what exactly is fractionally reserved at the banks??? can you describe the reserves part and what it looks like and then describe the dollars that are spent but are not reserves??

james b. longacre February 2, 2011 at 2:46 am

does the treasuy make new dollars??

james b. longacre February 2, 2011 at 2:51 am

is currency money?? is there a distinction to be made between currency and money??

Tiberyus August 16, 2010 at 3:24 pm

>> that banker creates and issues credits payable on demand
Which it wouldn’t be able to pay on demand if a number of people demanded it.

james b. longacre August 17, 2010 at 4:34 pm

why not? do mechanisims exist where the credits would be created and payed?? what do the credits look like??

what does just creating some credits involve?

james b. longacre February 2, 2011 at 2:48 am

pay in what?? if a current bank checking account has a balance of $100.00. what specifically cant the bank pay if demanded??

james b. longacre February 2, 2011 at 2:49 am

heres a 50 dollar bill and a fifty dollar check??? demanded and paid??

Paul in Lakeview August 16, 2010 at 3:29 pm

(1) Any knowing apologist of the Fed who hears or reads the claim that “It ["the Fed"] fires up the printing press” ought to have a good laugh. The FR Banks do not print FRNs, and the printing presses used to print FRNs are not operated by the BoG of the FRS. If the Fed’s apologists want to discredit skeptics, they could hardly do better than to shut up and let scholarly skeptics dumb things down for all the cranks who inevitably will confidently parrot such metaphors as if they were literally true.

(2) “Is Our Money Based on Debt?” In April 2009 a young protester, apparently twentysomething, at an anti-Fed rally in Chicago held up an FRN and confidently told me “this is debt”. So I asked him how much he would pay me to take that burden, that debt, off his hands.

He was dumbfounded. Didn’t know what to say. And one of his few companions was raving about something she called the “Codex Elementarius”, allegedly related to a conspiracy to starve millions to death. For a while I suspected that they were shills hired by the Fed’s apologists.

(3) “We have to ask, how did these notes come into existence?”

A: See http://www.moneyfactory.gov, site of the Bureau of Engraving and Printing. The CFO’s “Performance and Accountability Report” for 2009 is especially interesting. It gives the locations where FRNs are printed, the quantity of notes delivered, the cost per 1000 notes ($32.82 for 2009), the avg. billing rate per 1000 notes ($74.82 for 2009), qty of notes ordered for 2010, financial statements (bal. sheet, income statement, AND a stmnt of cash flows), and the independent auditor’s report.

There’s also a brief history lesson in the section “Profile of the Bureau of Engraving and Printing”.

james b. longacre August 16, 2010 at 4:56 pm

In April 2009 a young protester, apparently twentysomething, …..

probably as fake as the babies pulled form incubators in kuwait.

Bruce Koerber August 16, 2010 at 6:01 pm

Money Controlled By The State Causes The Rich To Get Richer.

Money is supposed to serve as the medium of exchange; that is its function. Money under the control of the State has a different function. In a hampered economy created by intervention money functions as a means to extract wealth from the unconnected political class and to distribute it to the parasitic political class associated with the State.

It is called ‘the rich get richer and the poor get poorer’ and it is a fascistic version of socialism.

Mike Sproul August 16, 2010 at 6:47 pm

Eric:

If the fed issues a dollar for assets of adequate value (a dollar, an ounce, etc) then the fed’s assets rise in step with the issue of money and the money holds its value. If the fed gets assets of inadequate value ($.99, .99 oz., etc) then assets do not keep up with the issue of money, and money loses value.

Matthew Swaringen:

The fed is not a counterfeiter. Whenever the fed issues a dollar, it gets assets of equal value in exchange, and stands ready to use those assets to buy back the dollars it has issued. No counterfeiter does that. This means that as new dollars are issued, the fed’s assets rise in step with its issue of money, so the dollar holds its value and nobody is robbed, as they would have been by a true counterfeiter.

james b. longacre August 16, 2010 at 7:28 pm

Whenever the fed issues a dollar, it gets assets of equal value in exchange,…..

what is an asset of equal value to a dollar if the dollar is a…..piece of paper?? 4 quaters??? 10 dimes??? my pin number on a machine???

Stephen Grossman August 18, 2010 at 11:24 am

>The fed is not a counterfeiter. Whenever the fed issues a dollar, it gets assets of equal value in exchange, and stands ready to use those assets to buy back the dollars it has issued. No counterfeiter does that. This means that as new dollars are issued, the fed’s assets rise in step with its issue of money, so the dollar holds its value and nobody is robbed, as they would have been by a true counterfeiter.

The rationalizations of socialist counterfeiting recall the Mad Hatter’s Tea Party. Money is a valuable, useful thing that is also used in trade. Counterfeit money is a valueless thing that is used in trade. Gold is valuable as jewelry. What is the usefulness of Federal Reserve Notes as ink-stained paper? Perhaps something found in a toilet…There is another Tea Party that’s abrewin’ and that, with a reported 50% of voter’s favorable to it, has a chance of ending the Mad…uh…Federal Reserve Tea Party. Fiat money is a shell game whose effectiveness depends on the speed of the spin and the number of shells.

james b. longacre February 2, 2011 at 2:55 am

it gets assets of equal value in exchange,

who determines that?

pbergn August 16, 2010 at 7:15 pm

Article mixes two separate issues together: Fractional Reserve Banking and existence and the ability of a central bank, in this case FED, to print money pretty much arbitrarily…

1. Fractional Reserve Banking; There is no problem with FRB, for as long as the customers of the bank are aware of the fact. Even on the 100% gold standard, a certain bank could loan the deposits of some customers to the others. In this case banks risks a default if a bank ran happens.
The Free Market Principles do NOT preclude FRB. It is a legitimate business practice for as long as everybody is aware of it…

2. Central Bank/FED: The central banks are supposed to facilitate the monetary policies of a State by regulating the money supply, and overseeing the issuance of the currency…
So, there is useful function for a central bank. The part the whole thing goes wrong is when a central bank (e.g. FED) or a government decides to just create the money backed by no asset to cover its expenses…
As I have mentioned countless times on this site, this is a political issue, and is NOT an economic one, for as long as the entity holding the monopoly on coercive power(i.e. the State) wishes so, it can regard pretty much anything as money, and there is nothing its subjects can do about it…

In the case of FED, the situation is exacerbated by the fact that it is owned by private interest (talk about privatizing the Law Enforcement, Army, Roads, etc…) and it “lends” the money it creates to the State it technically belongs to at interest, de facto becoming the perpetual motion engine for money supply… What a deal (talk about a steal deal, I mean, literally)!

Stephen Grossman August 18, 2010 at 1:12 pm

>There is no problem with FRB, for as long as the customers of the bank are aware of the fact

I have a counterfeit account that I’d like to sell you for some gold. My bank also lent it several times over to some businesses so there may be a spot of trouble in collecting on it. Think: “The Producers” with Zero Mostel and Gene Wilder. Is is OK if a bank lends out the contents of your safe deposit box, including those stock certificates and the jewelry from your dear ,sweet Aunt Minnie, may she rest in peace? And how will subsequent receivers of FRB “money” know its dubious origin? And what of the amount of goods and services remaining stable despite increased “money.” And the price rises, but not decreased consumer buying, encouraging capital investments that will necessarily fail because continuing price rises of investment costs and consumers consuming now (decreasing their future ability to buy the products of those investments) will eventually make those investments unprofitable? Your Pragmatism isolates your thinking in the immediate moment ,split from past and future. You need ideology, ie, science, ie, observed, systemized concretes integrated into a principle. A swirling blizzard of statistics wont help, even if youre Ben Bernanke. Statistics is an ape in a lab coat. “Hey, there goes another one. I wonder what it means or if it will happen again. Let’s keep staring and see if an arbitrary hypothesis pops out of our subconscious.” This is not the scientific method by which Newton discovered universal gravity.

Nicholas Gray August 16, 2010 at 10:13 pm

Here in Australia, I have advocated a ‘gold Pride’ movement, so that believers in a gold standard will be proud of their efforts to get us back onto a metallic currency standard. Maybe we’ll be able to meet and marry other libertarians openly, without being jailed! It could happen!

Ezekiel Krunch August 16, 2010 at 10:59 pm

The fact that there is so much discord among us “experts” proves that we truly have been bamboozled.

We are all too focused on what we believe to be true, so much so that we ignore the most obvious problem of all – that the money supply “pump” is primed with the principal portion of the loans to be repaid – without being primed with the interest that ALSO MUST BE DRAWN FROM THE SAME MONEY SUPPLY.

Said another way – the vast though finite supply of “air money” appears to have sufficient depth AS LONG AS BANKS KEEP LENDING (i.e. adding supply) AND THE ECONOMY EXPANDING, INFLATING THE SUPPLY. But slow things down, slow or stop lending, and the money supply growth depletes or retreats, as the theft / siphoning off of supply to pay off “unsupplied” interest begins to rear its ugly – and inevitable – head.

You see, the money supply is really primarily the PRINCIPAL supply, and there is not truly an INTEREST supply from which money should be separately drawn to make periodic interest payments. Virtually all payments of interest are drawn from a money supply created by principal debt! Add the impact of compounding interest over 100 years, and you have a dollar from 1913 being worth less than 4 cents today.

The frequent, relatively small regional bank runs of the 1890′s were indeed curtailed (delayed) by the FED system, but for one simple reason: the nationalized central banking system added additional “money supply”, delaying the inevitable shortfall of money for about 20 years – hauntingly the same amount of time that the First and Second National Banks of the United States held their charters to siphon off of our labor by way of usurious “interest” on air.

Smack MacDougal August 16, 2010 at 11:44 pm

When persons say “money supply” what they mean is the money supplied, that is, bankers’ credit.

For wherever you find money supply, you must find money demand. The clearing price is interest.

In the U.S. economy, there’s only money — Federal Reserve banknotes and U.S. token coins; both, which are kinds of fiduciary money — and then there’s credit, which is everything else, from ATM cards, checking accounts to corporate bonds.

Money retains the general power of purchasing, even in a bad economy. In a bad economy, credit can collapse as persons can refuse to pay or lack the means to pay, but a possessor of money has the power of purchasing, always.

If a thing lacks both the general power of purchasing and bearer negotiability, it’s not money.

james b. longacre August 17, 2010 at 4:44 pm

In the U.S. economy, there’s only money — Federal Reserve banknotes and U.S. token coins….

did you mean fiat money instead of fiduciary money?? does that so-called money come about in very different way from the credit?? are both regyuated and controlled by govt??

i can use my debit card on amazon but they dont take cash.

Smack MacDougal August 18, 2010 at 11:06 am

There is no fiat money in the U.S. Fiat means value by decree. U.S. politicians do not decree the value of a U.S. dollar. The values that arise from what a U.S. dollar can buy changes all the time.

U.S. money is fiduciary money. Fiduciary money is money that depends partly or wholly on the confidence that the owner can exchange it for other goods if it cannot get exchanged for primary money, e.g., for gold.

U.S. money has the status of legal tender, which forces anyone by law to use it to settle debts. It’s this legal tender status that instills confidence.

Gerry Flaychy August 18, 2010 at 12:08 pm
Ed August 18, 2010 at 9:09 pm

Ha, yes, legal tenders laws “instill confidence.” Like the threat of a clubbing instills confidence in the police.

The Kid Salami August 20, 2010 at 3:41 am

Comment from Smack “Smack” Macdougal:

“In short, economists of nearly all stripes do not get money, credit, banking, and commercial banking and sadly, this includes Austrian School economists who accept the false beliefs of Robert P. Murphy and Murray N. Rothbard.”

Another comment from same:

“There is no fiat money in the U.S. Fiat means value by decree. U.S. politicians do not decree the value of a U.S. dollar. The values that arise from what a U.S. dollar can buy changes all the time.

U.S. money is fiduciary money. Fiduciary money is money that depends partly or wholly on the confidence that the owner can exchange it for other goods if it cannot get exchanged for primary money, e.g., for gold.

U.S. money has the status of legal tender, which forces anyone by law to use it to settle debts. It’s this legal tender status that instills confidence.”

Ha ha. Very good. Which comedy clubs do you normally play at, I’d like to see you live? This might also allow me to test my hypothesis about how you got your first name.

james b. longacre October 3, 2010 at 4:44 am

if they say for all debts is that not decreeing a value???

Gerry Flaychy August 20, 2010 at 11:35 am

http://www.dictionary.net/fiat
“Fiat \Fi”at\, n. [L., let it be done, 3d pers. sing., subj. pres., fr. fieri, used as pass. of facere to make. Cf. Be.]

1. An authoritative command or order to do something; an effectual decree.
His fiat laid the corner stone. –Willis.

2. (Eng. Law)
   (a) A warrant of a judge for certain processes.
   (b) An authority for certain proceedings given by the Lord Chancellor’s signature.

Fiat money, irredeemable paper currency, not resting on a specie basis, but deriving its purchasing power from the declaratory fiat of the government issuing it.

Source: Webster’s Revised Unabridged Dictionary (1913)”
This definition of fiat money fits very well with the Federal Reserve Notes of our times.

The word ‘fiat’ has nothing to do with ‘value’.

james b. longacre August 17, 2010 at 12:49 am

and you have a dollar from 1913 being worth less than 4 cents today…………

does that really mean much of anything??? to anyone??? how many more dollars are there for people to use??? 90 percent more??? 95 percent more dollars???

james b. longacre August 17, 2010 at 4:38 pm

We are all too focused on what we believe to be true,

so you should be focused on what then?? i just ask questions here.

billwald August 16, 2010 at 11:31 pm

The $900 loan to Sally should be labeled as a $900 IOU from Sally.

james b. longacre February 2, 2011 at 2:58 am

does that still apply to todays checking accounts??

Jose Requena August 17, 2010 at 11:43 pm

Bank of England

On Wedensday the bank of England cut its economic growth forecast inwhich they are blaming uncertain pace of the recovery in the United States and the rest of Europe. “There are clearly risks,” Mervyn King, the Bank of England governor, said Wednesday, hinting that the central bank might consider expanding its stimulus package to support the economy. “Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated and there is great uncertainty about the outlook for both the U.S. and our most important trading partner, the euro area.” Add the bank of England to those who the over-optimistic group. The private [sry is still deleveraging and has a long, long way to go, yet economists think buyers are about to pile on more debt.“At this point policy makers should have reinstated confidence,” said Karen Ward, senior global economist at HSBC in London, “but the private sector isn’t taking up the baton in a way we’d hoped.” There was never a “recovery” in the first place. Economists for some reason just do not understand this simple fact. They remain Fooled by Stimulus With Structural Problems Still Intact. Let see what the future holds for the might dollar.

Alex August 18, 2010 at 11:46 am

I guarantee you that Robert Murphy never dreamt that his article would provoke such debate. I think, as many others do here, that some people are using different words for the same things and claiming that there are serious differences in understanding about money creation.

Maxwell August 23, 2010 at 9:57 am

Or to put it in really simple terms. Every time you apply for a loan whether it is a credit card, personal loan or mortgage your application with your SIGNATURE becomes the promissory note/credit note, In other words the application with your signature is monetised. Money is created out of thin air. Furthermore the banksters will monetise your signature up to 9 times the value of the original value of the ‘loan’ without telling you. It is FRAUD!

You have in fact borrowed your own money then you pay it back with interest. Win win for the banks, lose lose for everyone else. Why do you pay off debt twice?. The loan was paid back the moment you were ‘loaned’ the principal.

james b. longacre October 5, 2010 at 4:14 am

You have in fact borrowed your own money then you pay it back with interest.

where is your money when you get a loan?? a checking account?? how much of a checking account is cash and how much is some other type of currecny??? when you get a loan does your money- where ever your money is, get lowered somehow?? how do you get a 20k loan with 2k in a checkign account??

if its your own money as you say, why borrow it? why not just take it?

stilgar November 18, 2010 at 5:26 pm

I understand it (for the most part) that the money goes away when the debt/loan is repaid. What about the interest due on the money borrowed? That does not go away, correct? How does the interest owed figure in to the national debt? Honestly, how dumb is it that the very currency that is used by all citizens for the most mundane of purchases comes into existence with an interest payment attached to it some where along the way.

Drew November 28, 2010 at 4:15 pm

Interest was created by banks as a fail safe for the loans they lend out if for some reason that person dose not pay their loan they have not lost out completely due to the interest they have gained on that loan. Charging some one interest on anything back in the day would result in your death and it should have never changed. Interest is not recycled back through the economies, banks hold on to it and accumulate it as their wealth. Bank create money out of nothing pushing a few buttons on a computer, now no actual money is ever created just added to your account at the stroke of a key. Every time some one take out a lone for a car or a house the national debt gos up just a little more. Your grandchildren will still be paying off the loans you took out today as they take out loans to further this machines production. If the were no dept there would be no money its a proven fact (watch money as debt 1 and 2 it should sum everything up).

james b. longacre February 2, 2011 at 2:59 am

i thought collateral was for that??

Comments on this entry are closed.

Previous post:

Next post: