This is a fantastic post - I'm 100% going to start using the term "Casino-Chip Society" whenever I talk about "cashless" society.
There is another reason that cashless society is awful that was not talked about in this article, but I think is just as important - a digital dollar means that you have a dollar where it is impossible to commit crime. While that sounds like a good thing (who wants crime?), it very much stops being a good thing as soon as you bump up with laws that go against your morals. Designing systems with the assumption that we will always have democratic and free government is a horrendous idea, allowing the government to have a complete record and log of every single transaction you ever make, as well as having the ability to stop you using digital money, makes it so easy for fascists.
> a digital dollar means that you have a dollar where it is impossible to commit crime
Maybe. You'll probably just be able to convert it to some other form of value at a loss and then continue from there. Plenty of governments have envisioned the end of the "black market" only to be shown how utterly impossible that idea is.
No you don't, or at least, no I don't. My bank has fees for depositing cash (more than x times a month), fees for withdrawing cash (even at an atm) and fees for holding my cash (having an account.)
Which country do you live in if you don't mind me asking, and are you talking about personal or business accounts? In the UK there are "premium" personal bank accounts that will charge you a (low) monthly fee, but you usually get benefits from these such as free travel insurance, and the fee will often be waived if you deposit £x per month. Transfers to most countries are free, withdrawals and deposits are free and two of my accounts don't charge for currency conversions or foreign withdrawals.
Traditional business accounts will sometimes charge withdrawal and deposit fees (especially on cash at the counter), and usually charge an (again low) monthly fee, but even in that sector you can find lots of accounts now that are essentially free.
I'm curious whether this is different in other countries.
But if you had kept the cash for that same amount of time it would have lost the same amount of value to inflation. You don't lose any more value from switching between levels.
> a digital dollar means that you have a dollar where it is impossible to commit crime.
This is overly definitive. For example, in Poland, it's illegal to run a private online poker site and yet there's plenty of operators doing it. They offer digital money transfers via payment processors which specialize in skirting the law, such as Neteller, Payza etc. The Polish state doesn't care enough about its own laws regarding online gambling to clamp down on such practices and so people are happily commiting crimes using the "digital dollar".
The GP phrased that way too much like an allegory from under a rock and not enough like an internet comment.
(I think) He means that digital currencies remove plausible deniability.
The Polish government can both claim to crack down on gambling to its conservative supporters and at the same time avoid investing too many resources in pointless anti-vice enforcement. The second they have a digital ledger of all transactions in the country, they either have to get real with their conservative supporters who will vote them out or really go after all the people gambling whose bookies will drag them out from their beds.
With better surveillance tech (no cash being an example of this) you can pave the way for future governments to exercise that power in bad ways even if the current one is lenient.
> it very much stops being a good thing as soon as you bump up with laws that go against your morals
A pretty explicit part of the fascist ideology per se is that laws are merely morals that are written down and enforced. The idea is that people adopt their moral code from the central government who defines how people "should" perceive the world in order to make citizens obedient to the dogma of the state. Willing fascists do everything they can to dissolve any notion of personal choice in the matter, for themselves and for others, and by their very constitution cannot conceive of morals existing outside of a system of authority.
Laws and morals are both normative claims about the actions of individuals, but while morals are concerned with individual actions, laws must be concerned about societal-level ramifications of not just the actions, but also the enforcement of law. For example, most people would agree that adultry is bad and immoral. But as a society we've decided that its immorality isn't sufficient to overcome the ills of being punishable by the state, and thus it ought not to be illegal. Stealing to feed your starving family is moral, but we don't want to support theft in general so its illegal.
In a free society, one must recognize that legality ought loosely follow morality, with the ideal being that illegal actions are the strict subset of immoral actions which cause greater ill than the enforcement of their illegality. In the absence of an oracle into objective good and evil, a society must err on the side of not making things illegal which could potentially either be not worse than the ill of their enforcement, or not be immoral at all.
The all-to-common trap is to confuse the direction of influence: morality should influence legality, never the other way around. Allowing legality to influence one's perception of morality is simply surrendering your autonomy to those who greatest influence the law, and is a sure-fire path to authoritarianism.
I think the difference is that the totality of morality is supposed to come from the state in Fascism.
A well functioning society necessarily ought not legally forbid things that I consider immoral, which allows for personal autonomy with regards to ethics.
I think that would be better stated as in totalitarianism, the totality of morality is supposed to come from the state. Fascism is only one form of totalitarianism.
Of course the goal of law writ large is to engender "good" conditions in a society by restricting "bad" elements and encouraging "good" ones. In this sense the law has a moral quality.
Roughly speaking, "law" is morality as practiced by a state. The difference is in the acknowledgment or ignorance of the laws' congruence with the moralities of the citizens' opinions and preferences those laws are meant to represent. One could say the entire goal of democracy is the messy process of aligning the state's morality with the collective morality of its citizens. Fascism is then comparable to defining a single normative moral position and imposing it on the entire populace unilaterally.
Many laws are just mechanisms for coordination and organization of society. In the U.S. it's illegal to drive on the left side, and in the UK, It's illegal to drive on the right. Which side you drive on isn’t a matter of morality. However, knowing that everyone else is going to drive on the right (or left) keeps traffic flowing and reduces accidents.
All laws make you less free. Laws exist to restrict freedoms in order to create a better society - what a better society means is the part where political differences come up. Most people can agree on laws existing to prevent harm unto others, but then what does that mean? Answers depend on your values and goals, and are fundamentally what politics are.
The point is though, all laws make someone "less free", because the purpose of law is to prohibit.
The law establishing public libraries doesn‘t just say "let there be public libraries". It designates a source for funding, making it a reason that taxpayers are less free. It forces publishers to sell/give books to the libraries.
If it could just exist without restricting someone‘s freedom in the wider sense, we wouldn‘t need a law.
> Privately funded libraries didn't need any laws.
Not sure if this was meant to be a troll, but obviously private libraries depend on someone enforcing private ownership in general. Public libraries have some very specific legal carveouts (e.g. around protecting patron privacy) but otherwise are treated the same as private libraries, only publicly funded.
Lol. Libraries are huge buyers of books and drive demand.
Publishing wouldn’t exist without libraries. Something like 90% of book retail space has vaporized, and the ruthless consolidation makes the top 50 authors utterly dominate sales.
This is one of the problems with polarization. The legitimate points of one side get grouped in with all the other ridiculous crap.
Every law, every program has a cost. Many times this costs are worth it. And there are plenty of times where they aren't, or have unintended side-effects.
Pointing out these costs and forcing society to recognize them as explicit decisions and tradeoffs is one of the key benefits of the Right, even if you disagree on where they fall on the balance of net-benefits in the final analysis.
> Pointing out these costs and forcing society to recognize them as explicit decisions and tradeoffs is one of the key benefits of the Right
I don't think either side is better or worse at this. It's more like, point out the costs of the other side's policies while glossing over the costs of your own.
Abortion is a great example. I never hear a pro-life argument that starts out "abortion should be illegal but it will create all these unwanted babies and here's what I propose we do about that and what it will cost. We'll vote on outlawing abortion but it will be tied to tax increases to pay for programs to ensure these children have proper nutrition and education."
The idea that the right cares about babies right up until the moment you're born is common enough that George Carlin was joking about it in the 70s.
This is not true at all. We have many laws which restrict the government. Many amendments do this. Or the Respect for Marriage Act as a recent example, which restricts what the government can prohibit and provides for marriage rights for people who might not otherwise have them.
What about a law that says you are entitled to a lawyer when arrested? Or a law that says if you overpay on your taxes, the government has to make you whole?
There's the 'arrested' part and the 'taxes' part. There are limitations on the power we give the government to arrest people and to collect taxes. But the limitations are only there because of the freedom we loose in exchange for criminals being arrested and public services paid for.
If there was a law that said everyone must only wear blue clothes on Wednesdays, that's taken away your freedom to choose what to wear. If there's an exception to that law that says socks can be either green or blue, that's not the law granting a new freedom to wear green socks, it's a law not taking away a freedom that existed before the blue clothing law.
The history of civil rights progress is characterized by marginally deviant behavior(for the time) slowly becoming more accepted and mainstream. Take LGBT rights or marijuana for example. If you disallow even the slightest level of deviance than you potentially neuter the ability of money to participate in that process.
I go to various banks and trade in the level 2 for level 1.
I take my billions of level 1,and stick it in a warehouse.
Maybe one day I even set it on fire.
What does this mean? Does the fed recognizes the loss, and just print more? Have I in effect just shrunk the economy? My level 2 money is still in the system, its just the paper has vanished.
By extension, say every person loses one $10 bill every year, in an unrecoverable (by anyone) way. Presumably that's factored into the money supply?
Is changing the paper (as in the UK this year) a way of "cleaning the balance sheet" - effectively preventing some truly monster hoard from suddenly appearing?
Yes. If the (overall) nominal money flows decrease but (overall) real economy size stays the same – to the extent that it’s going to change prices for no “real” reason – people and central banks are likely to notice and may react.
Central banks are tasked with stabilizing price levels. (Why? Predictability helps people make decisions and plans, and get rewarded for them. Caveat: price changes that originate in changes to real economy convey valuable information about real scarcities and surpluses. This one, kinda, doesn’t.) Prices are closely related to the ways money circulates in the economy – so CBs keep a close eye on these stats. (Why? In short, it’s a big factor in the simple monetary formula, MV=PQ, that is: overall amount of money * money velocity = price level * quantity of real consumption.) The fact you froze or burned a lot may influence how that looks, in turn possibly influencing CB decisions to put the finger on this or that scale.
Of course, the CB doesn’t know what you did exactly, it’s playing an aggregate game. Right now it would appreciate that you counteracted inflation – made everything a bit cheaper by not spending or loaning your billions for others to spend.
What I'm wondering is .. when you own stocks of companies it is like having one type of currency, one per company or fund. (right?). Now when the stock-market goes down I lose money. And so do most people who own stocks. Where does that lost money go?
Everybody lost a lot in the most recent downturn and (most) nobody gained. We simply have less "value" now. Where did that value go? How could it have just vanished?
Stock isn't currency. It's an ownership claim on the assets and future profits of the company. If a stock price goes down it means people in aggregate have judged the assets and future profits to not be worth as much as they used to be. No value was lost, the stock still represents the same ownership claim. People just in aggregate changed their prediction for the future of the company.
So that's level 3 value right? It's not money (level 1) or even chips (level 2).
So I'd say it's inaccurate to say you lost money. More accurate to say you lost value.
When the shares were issued (out of thin air) they had speculative value - they are promises for future dividends (presumably level 2) based on future profits.
The stock market acts as a level 2/level 3 swap place, and hence let's you calculate the "current level 2 price" of your level 3 paper.
So yes, the value simply got lost. But balance that with the way it simply got created in the first place.
And bear in mind that _all_ shares go to 0 in the long run. Ultimately the future arrives and that future value speculation is fully realised.
Company A issues 100 stocks and sells each one for $100. Company A has a $10,000 market cap.
Investor X sells a share of Company A to Investor Y for $110. Company A now has a market cap $11,000 because each of their 100 shares are now valued at $110.
Investor Y sells the share of Company A, but can only find a buyer (Investor Z) willing to pay $90. Company A now has a market cap of $9,000 because each of their 100 shares are valued at $90.
For the value of a stock to go down people have to sell it. What the people who have not sold lost, the people who have sold gained. Overall the money supply has not changed, money has just moved from holders to sellers
> Designing systems with the assumption that we will always have democratic and free government is a horrendous idea
I wonder if that's why germans are so against anything that is privacy invading while swedish people are quite happy to have their home address publicly known.
This is so good. I was in another thread suggesting that, even if you hate crypto, it's still valuable to understand and accept the "fiat is all made up" idea, even if it's often badly stated and argued.
I have a degree in economics, but I confess I really didn't understand the whole thing until much later in life, when I was able to look at it through the lens of e.g. video game design. Which is to say, there are real consequences and real effects of actions -- but the economy still isn't something like "nature" or "scientific" despite what many would have you believe. It's much more like a designed game who's rules can be tweaked, sometimes arbitrary, etc.
If money only exists in the mind of people, how could there truly ever be a "science" of it? It strikes me, from a somewhat cynical point of view, that "economics" is a somewhat confused and lower resolution study of "psychology," which I think offers a the workable explanation for your final sentence.
Numbers also only exist in our minds but that doesn't make mathematics a branch of psychology. There is a rational side to economics because money can be measured and the measurements are reliable.
The unpredictable side of economics is of course the behaviour of the various economical agents, and regarding this I think economics is closer to astrology than to psychology.
> economics" is a somewhat confused and lower resolution study of "psychology,"
Maybe sociology, since money matter because it can be exchanged between people, but personally I don't think you'd be wrong for thinking about economics as a narrow but important branch of sociology/psychology, in the same way you might think of biology as a narrow but important branch of chemistry and physics.
It's like game theory. Once you set rules and laws you can mathematically model and analyse players' behaviour in reaction to those incentives. Assuming players follow a selfish strategy can be a useful approximation of the psychology sometimes. Since it's 'just made up' societies can modify the rules.
I'll concede physics, and settle for the C grade for my Etymonics. But
unless you're arguing for the possibility of rigorous economics (I
hope not) the spirit of my point is the fault-line between praxis and
what is broadly universalisable.
Is "political science" real? (I personally think there's a case), but
why did that have to arise besides politics? I studied electronics and
am happy to report, compared to its foundation in physics, it's an
ever changing craft of black magic and tricks you can do with silicon
and electrons. Need proof? Where is the craft of thermionics today?
As for economics, I don't really know. Some days I have hope in its
use. Other days I think its very conceit is the root cause of much it
sets out to solve.
More the study of human behavior under the environmental conditions of markets, or groups within firms. You can study animal behavior in the environment of a zoo, as opposed to say, a savannah or jungle.
If the market is a distributed algorithm, then money is a representation of some of its free variables.
Both are made up in the sense that the algorithm itself can be modified by regulation or social convention. There's even a field of economics dedicated to finding out how to engineer such an algorithm (a mechanism) to satisfy a given objective.
But if the algorithm is more or less stable, then it makes more sense to study it rather than just parts of its state. That's the difference.
I'd throw out that if attempting to make analogies to crypto - as I understand it - the standard US bank has pretty specific rules, reporting and audits w.r.t. how high the ratio of L2 to L1 can go and to whom/how/what uses the L2 money can be the loaned out.
The crypto exchanges do not have any such rules, reporting or auditing requirements and can self-report as L2 but in fact be some custom self-defined push the boundaries of acceptability Layer (a la FTX advertised as L2 but loaning the customer balances to its Alameda Research "hedge fund" partner).
But in the real world, bitcoin and indeed all of crypto is a/are token/s without an army behind it or any form of legal promises except those conferred to them by $L1. Unless you want to go to El Salvador or that one other nation that made it legal tender, Bitcoin is L2 (and a shitty one at that looking at stability, fees and speed)
It has as much need for it as the dollar, which is either "both need it" if you're focusing on the warfare part and using "petrodollar" as rhetorical emphasis, or "neither needs it" if you're focusing on literally the support of petroleum and using "warfare" as rhetorical emphasis.
"Both" is because guns beat bits. Or, to put it another way, if the USA had used Bitcoin instead of dollars in 1960, the Soviet Union would've been just as much a threat, and similarly the forced nationalisation in Cuba after the revolution would've happened no matter who recorded what on any blockchain.
"Neither" is because petroleum is just one of the major energy sources of the last century, vital for the industrial strength of the US economy and its capacity to actually make things worth buying (in addition to uselessly trinkets), but not the power source of the next century.
No, there is an asymmetry you are missing. The "well the dollar has an army behind it" is only extremely narrowly relevant to anything, in that the US can force dollar settlement with the military. This is only necessary because people either don't trust the issuer or don't want to pay seigniorage fees to the US. Neither of these is relevant for btc.
This article is bad, and contains several falsehoods, but the worst one is about fractional reserve banking:
> banks are able to issue out far more digital chips than they have in a state money ‘behind the counter’
> Imagine a person arriving a casino with no money but requesting chips nevertheless - this is pretty much what happens when someone approaches a bank and asks for a loan.
This is just completely wrong - banks only loan out money they have. If you go to a bank and get a loan the bank didn't just edit a database entry - they had that money. Banks loaning out money they don't have is extremely illegal.
The reason that banks ""create"" money is because when you loan money it ""duplicates"" it. You don't have to go through a bank to see this in action: Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled. Banks just do this process with your money and pay you interest for the privilege.
This is the reason that banks are sometimes required to keep some percentage of their money in reserve (and thus where the name fractional reserve banking comes from), because otherwise the same money could be loaned out forever and the maximum money supply would be infinite.
=======
EDIT: Because everybody seems to be ready to link the same Bank of England paper.
Yes, this is an simplified and slightly incorrect model of how it works in real life. In reality, this process is asynchronous: the government gives banks permission to loan out the money _now_ and figure out the backing cash later.
They don't have to keep track of who's money is loaned out to who as long as the balance sheet works out at the end of the day, and some percentage of assets are kept in liquid form (I believe it's something like 4%-5% in the US).
In the end, the point is the same: the government controls the creation of money, even if banks are the agents by which they do so.
The analogy the author has of a casino just going into debt by creating chips out of thin air is inaccurate and extremely misleading.
If everybody were to claim their chips, the casino would go bankrupt. If everybody were to simultaneously pay off their loans and withdraw their money from the banks, the banks would be fine (and have the interest payments they collected left over).
> This is just completely wrong - banks only loan out money they have. If you go to a bank and get a loan the bank didn't just edit a database entry - they had that money. Banks loaning out money they don't have is extremely illegal.
I'm afraid to say that this is completely wrong. Commercial banks do in fact create money via lending! The 101 textbook explanation offered here is at best outdated and at worst misleadingly perpetuates a myth that simply must die.
The Bank of England's note on money creation in the modern economy [0] is the place to start - and more or less reflects the explanation in the article.
Page 19 seems to show that the newly generated money has to be backed by somebody's deposit and not just minted though. Like for any situation that doesn't involve you taking a loan from a bank to use that money at the bank the BoE paper calls out that the bank needs to get deposits from where you're sending the loan.
So, you buy a house using say Chase and the seller has Wells Fargo then Chase "mints" say 1M the money for your loan but then solicits 1M of deposits from Wells Fargo. like why does it matter if the 1m for your loan came from Chase depositors or Wells Fargo depositors? The point is that it's backed 1:1 by cash that came from a person which BoE example shows.
> the newly generated money has to be backed by somebody's deposit
Ok. Suppose I am a bank, and pg deposits $10. Then I lend to you, lesourac $9. This $9 is "backed" by pg's deposit. But I, the bank, only hold $1, and you, lesourac, hold $9.
In your head, you hold $9. In pg's head, he has $10 of assets. There are $19 of imagined assets running around, even though the "real" assets are only $10.
It's all good until pg pulls his $10 sooner than I expected, or if you, lesourac declare bankruptcy and default on your loan, and unable to pay back those $9. This is why bankruptcies are deflationary.
We could have a safer banking system if loans were from individual to individual, possibly mediated by a bank, and the lender fully accepted the risk of default.
Oh interesting. That seems academic given the reserve requirements by the Fed under Regulation D which basically says every bank must have $x dollars in reserve for every $10 loaned out. Thus, the bank already has to have that $10 deposit before it's able to make the loan, but as long as those reserve requirements are met, they can make all the loans they want. Given the size of a commercial bank with deposits and withdrawals going on constantly across many customers, they run with some amount of margin, but basically they'll be able to make a good number of loans before they're anywhere close to their reserve limit. So to answer your question... sorta?
So, the side I don't particularly like goes like this. Alice deposits $10 into Bob's Bank. Bob's bank now has $10 of liabilities (Alice's account) and $10 of assets (Alice's ex-Money). Charlie _wants_ a loan of $10. Bob records an increase of assets by $10 so now the bank has $20 in assets and records a corresponding increase in liabilities (to balance out the minted money) of $10 so now the bank has $20 in liabilities. Then the bank gives Charlie this _new_ money. In essence, the bank is not giving out depositor's money for loan but instead new money. (See the Bank of England (BOE) paper for details showing this [1]).
My argument is that (1) the same BOE paper shows that whenever that minted money needs to leave the minting bank's computer systems an equal amount of money from somewhere (either that bank or the receiving bank) will be destroyed. (2) That money will commonly move between banks. Therefore the fact that money is minted is irreverent because it's subsequently quickly destroyed.
Side note, it makes total sense to me that a bank would rather mint money in a lump sum exactly equal to the amount needed for a loan than figure out what fractions of the loan should come from what depositor. Its just practical.
Do you consider the value in your yield bearing savings account to "not be money" in the sense that your stocks "aren't money"? If the median American does, then your argument holds water. I don't think this is the case, though.
The BoE considers savings accounts to be part of the 97% of money in an economy. Although I'm still not too sure if you're on the side of a bank using a depositor's money or minted money for a loan.
> Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in
circulation.
I don't mean to be rude. I really like Hacker news. It's a great place to get a wide range of interesting posts with a technology focus, and great talking points from people who have specialization within these areas. It reminds me of the early days of slashdot and even digg. However, it frequently falls short when it moves into areas outside of this. Especially when it's finance or fintech related fields. I think too many people here are well regarded in their tech field and think whatever thoughts they have on areas outside their lane is wisdom, even if they haven't spent much thinking of or gaining much knowledge in said field.
The maximum money supply is infinite, and the marginal value of dollars approaching an infinite number is zero, and every levered loan, derivative contract, and rehypothecated asset creates new hot money out of risk.
Banks pre-2008 were loaning out 30x the cash they had on hand. That is what creates the money. The loan creates it. This is not loaning out money they in fact have at all, it's pure risk compensated for by the rate of interest. The rest about fractional reserve is mostly accurate, but that fraction of reserve they keep and lever up 10-50x, and then charge fees, interest and commissions back on - together these make the bank a dynamical system whose failure mode requires exogenous recapitalization. Banks are just government backed hedge funds with airs.
The challenge with the article is that if you stop believing in the integrity and base reality of fiat (layer 1 capital), apprehending the consequences of what else has (or doesn't have) meaning is a bit much to ask of most people who work really hard just to align to their norms and are very personally invested in them. Cryptocurrencies were a forcing function on a critical theory of money, and that's more radical than mere 20th century radicals were willing to go, imo.
Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.
Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.
I work at a bank in the US, your statement is false for almost all non-federal banks. There’s some complexity to it, but in general banks are required to have roughly 5% of deposits liquid at the close of every businesss day. There’s some wiggle room, but banks are never allowed to go below 0%. If it looks like they’re going to risk going below 0% they can borrow money from other banks with too much cash through the repo market, but this is expensive and regulators don’t like it so banks will strictly avoid this.
This actually explains why different banks will have different loan/share rates from each other. You’d expect in an efficient market they’d all be the same, but banks deliberately make their offerings less competitive if it’ll leave them with too much cash/debt.
In short, banks do not just create money in the US. They are heavily regulated, and any bank that started cooking the books and lending more than they have would be swiftly taken under management by its regulatory body.
One point that might make this clearer - the government serves as the lender of last resort for a bunch of banks. Lending more than you have would be incredibly risky - why would the institution that has to eat the potential loss allow you to do so?
Most banks are regulated by either the FDIC or NCUA, not the Fed. So the fed setting reserve rates doesn’t change anything for banks that, like, normal people use.
Additionally, I think you’re viewing reserve rates as the only way banks measure liquidity, which is not the case.
But, even if reserve requirements are zero, and banks are allowed to loan out every penny… they’re still not allowed to just make up money, that’s not how it works.
At 5%, banks can create 20 times more new money then they hold deposits.
Obviously they don't have to go below 0%, as at 0% they are already at inifinity.
Also, they don't have to have the reserves when they are lending, they can just borrow the reserves later, which is a huge difference, as just as we've discovered - lending creates money, so you can stuck it up structurally and keep expanding.
Bank A creates $95 worth of loans, which get deposited to Bank B. Now Bank A has $100 deposits, $5 reserves, $95 loans. Bank B has $95 deposits.
Bank B creates $90.25 worth of loans. These loans gets deposited to bank A. Now Bank B has ... $195.25 deposits and is ready to make $85.7375 in loans again...
> Loan creation doesn’t work like that for many many years. These days banks don’t even have a reserve requirement. They just create the money and balance the books later.
> Edit: to make my point clearer, banks don’t need your deposits to create new money. They just do.
This is not true. Like I said, banks only lend out money they have. The only way banks "create" money is because the same money can be lent out multiple times (Bank lends out Person A's money to Person B; Person B deposits their money at a bank; Bank lends out Person B's money to Person C; etc)
You are wrong. Banks don’t need deposits to create loans/money. They crate the money, out of thin air, as the conspiracy theorists like to say it, and they pay the central bank interest on it. That’s it.
I'm presenting an outdated and simplified version of the process, because yes, you're correct in the short term. The process happens asynchronously where the bank gets to loan out the money now and sort out the backing money later.
But it has the same _effect_: the government controls the maximum money supply and the creation of money.
and what would then happen if a bank were -- somehow -- induced to make more of those loans, which, as you describe "duplicate" or "create" money a number of times up to the number of loans made?
and how would the world look if that same bank then decided to stop making so many loans?
would there be a difference in the total money "created"/"duplicated" between those two worlds?
you can quibble with language ("Many people get ensnared in a series of linguistic traps when they talk about bank accounts." - quoting the article) but I think you'll find the OP and other commenters here have a sufficiently reasonable model of what is happening under the hood in the modern banking system. I suspect if you view the OP charitably and accept that he does understand what's going on and is describing the relative difference between these two hypothetical scenarios I gave above as "more or less money creation"...the essay becomes less "bad".
> Bank lends out Person A's money to Person B; Person B deposits their money at a bank
You describe this as a two-step process, but it's actually one step, with no actual cash involved. If Person B gets a personal line of credit, it is issued as a deposit in their account at Bank, not paid as cash which is then deposited.
Even if Person B immediately spends that money (on e.g. a house), it is transferred to Person C (former homeowner) directly as a bank deposit, either at the same bank or a different one. There's never any direct cash involved - only bank deposits are moving back and forth.
> You don't have to go through a bank to see this in action: Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled.
The world now has $40 debt in it, it still only has $20 of spending power. Suppose both Alice and Bob sell their debt to Donna, sight unseen (ie only the amount is known). Bob still owes $20, but now to Donna, effectively canceling out the $20 he received for Charlie's note.
In your example, there is still $20 in the economy after Bob lends Charlie $20. Alice has $20. She loans it to Bob. Alice has $20 in assets (the loan), Bob has $20 in assets (the money) and $20 in liabilities (the loan). The net amount is still $20. If Bob loans Charlie his $20, the net is still $20.
Banks do create money via lending, but the money creation comes from the interest charged. For example, if Bob lends Charlie $20 for a year and charges 10% interest to Charlie, he'll have $22 after one year. Where did the $2 come from?
Yes, the money came from Charlie. But at the beginning, there was only $20 in circulation. After the loan is repaid, there is $22. Money was created from the loan.
The bank didn't create anything, though. It got the money from Charlie. If it wasn't in circulation before, Charlie must have created it. Off to prison with him.
The bank did create the money. There is an element of cash flow to all of this. Charlie takes the loan, uses it to start a business, perhaps by buying something from Bob. Bob uses the money to pay back Alice. Alice then buys something from Charlie, allowing Charlie to repay his loan. The economy is basically a big flywheel.
> the money creation comes from the interest charged
This bit. This is the bit that's wrong. There is no money being created when interest is charged. The bank is certainly not creating it in this transaction: it is charging interest - that is, it is asking someone else to give it that money.
Ok, then where did the extra $2 come from in the example? Yes, ultimately Charlie pays Bob $22, but there is only $20 in circulation when Charlie takes out the loan. There are a bunch of moving pieces here that are all tied together.
1) There needs to be liquidity in the market place. Money needs to be flowing to and from Charlie for him to be able to service his loan.
2) Charlie needs to be engaged in an economically productive activity so that he can bring in cash flow to service the loan.
There's definitely some other prerequisites to bootstrap the system as well. But the loan is what increased the money supply. The interest has to come from somewhere. Which is also why banks can't create a limitless supply of money. The interest has to come from somewhere. There is a certain amount of money that can be put to genuine economic use. If banks lend more than can be put to economic use, you have bubbles like we saw in 2008, or you have inflation like we have now.
What you appear to be saying is that if I lend you $20 at 10% interest, the fact that you have to either eventually pay me back $22 or default on our agreement means that I have somehow created that $2.
Can you please clarify either how that is different from what you are saying, or if that is what you are saying, how it makes any sense at all?
But if they take all of their money out of the bank then Alice has $30, Charlie has $30 and Bob has $30 which adds up to $90 (aka $40 more). Charlie and Bob still owe $40 combined but the point is not the net amount of dollars change its that the assets/liabilities increased by $40.
Will Alice take Charlie’s IOUs for $20 from Bob to settle?
Will Target take Charlie’s IOUs for $20 from Bob in exchange for socks and underwear?
The answer is no. Charlie’s IOUs and Bob’s IOUs are like Lloyd’s Samsonite briefcase filled with scraps of paper in Dumb and Dumber. Worthless.
However, if Alice deposited $20 in a bank and is issued a debit card for that bank, and then if Bob went to another bank and was loaned $20 and issued a debit card for that other bank, and then Charlie went to yet a third bank and did the same…
Alice, Bob and Charlie have: $10 cash and $20 on their debit cards.
Bob and Charlie also owe the bank money… but in the meantime all three can go to Target and buy $20 worth of socks and underwear and still have $10 in cash. If Alice, Bob and Charlie have a positive balance in their checking accounts, ACH will ultimately (via hand waving) handle settlement between Target’s bank and Alice, Bob and Charlie’s banks.
When Alice deposited $20 at the bank one real and two accounting things happened: the bank put the $20 bill in their safe and debited $20 to their cash assets and credited $20 to Alice’s checking account, a liability on the banks books.
This is called double-entry accounting. The same double-entry happens with a loan: Bob’s IOUs are a kinda risky asset but they are still balanced with $20 credited to Bob’s checking account.
The system works for a few reasons, but mainly because everyone trusts each other’s banks and our banks trust each other. The Federal government instills a lot of trust and stability to the whole system. Banks can trade in cash, bank IOUs, and Target, Alice, Bob and Charlie IOUs and that enables quite a bit of commercial activity.
I understand how debits and credits work in fractional reserve banking and how money is created in such a system. I don’t understand whatever OP was describing.
It’s not a closed system or a zero sum game. The average loan has positive expected value in terms of new, real goods and services being created – so it can be accompanied with an increase in nominal amount of money. The casino analogy falters here, because gambling is associated with, at best, only intangible entertainment value creation, and at worst, value destruction. Banks are somewhat free to create money, because they enable making new real value, and carry much of the risk for bad calls.
What exactly is wrong with it? Is it really unequivocally dead wrong, or is there some subtle point of contention I'm missing? I'm having a hard time trusting MrPatan and cmeacham98 over the Bank of England.
I think the article would have been better if it used standard money supply definitions M0, M1, M2, and M3 instead of the "Layer" terminology. That way the reader would be able to carry that knowledge to other conversations. But an advantage of his terminology is that it keeps the layers separate while the standard definitions are nested, so M1 includes M0, M2 includes M1, M3 includes M2. With his layered model he is able to highlight some of the power struggles more easily.
The vast majority of the money supply created by central banks is digitally created. I am entirely at a loss as to why this supposed introduction to how money works consistently implies money created by the state approximately equals cash, and that cash is particularly special. That's not how it works. And because that's not how it works, a cashless society is nothing like as radical change as the article implies. Cash is already of only limited importance.
So I'm paid in casino chips, pay my mortgage and credit cards with casino chips, pay my taxes with casino chips, and only ever use real money at the laundromat. Seems like the chips are more "real" and relevant at this point than the pieces of paper with no intrinsic value.
That's not what he's saying. The "digital money" can be real if it is put into circulation by the central bank, by buying assets. There is no inherent connection to paper currency.
You may feel like you're above this, but this excess leverage in the economy affects everyone who has a mortgage, works a job, or participates in the traditional economy in any way. For instance, businesses regularly draw on their credit facilities to make pay, and even well-run businesses usually hold debt. The artificially set price of these "chips" has a massive effect on all sectors.
But they are still the same, just more convenient. The state gives the money value, be it paper or digital. They could even create a third currency, literal plastic chips, and they’d also be the same. The articles goes from condescending to their conclusion, but they just fake explaining anything, they don’t actually.
As of 2020, the Federal Reserve lowered reserve requirements to ZERO. And in Canada too. That means banks can now issue money without being required to back it by L1 money.
Those trillions “printed” and given out to people as PPP loans were originated by banks. But the loan forgiveness comes from where? Who pays the liabilities these banks have to each other?
Technically, the banks can simply cancel liabilities they have to each other. If Bank A issues a loan or credit card and it is redeemed for credits in Bank B, while Bank B does the same for bank A, then the banks can simply cancel out their debt to each other when they settle their balances periodically using the Automated Clearing House (ACH) system that is also run by the Federal Reserve.
So banks can issue a ton of money to spur economic activity, and then cancel the debts to each other and take it out of circulation.
I started https://intercoin.org to making an alternative way to the banking system, allowing cities and other communities to issue their own currency (eg Berkshares, Bristol Pounds etc.), give it out as a UBI and then tax it back to remove money from circulation (fiscal policy). The fiscal policy can then be used to mitigate negative externalities like pollution etc. So the monetary and fiscal policies are managed by the people. The businesses are getting money from people spending money on things they actually want, rather thank bank underwriters trying to guess whether there will be a lot of demand for the business’s services 5 years later.
Crypto has been captured by ponzi schemes and nonsense. But the real value is in communities. Real goods and services by people accepting the local currency is what backs the local currency. The other stuff (“redeemable for gold, etc.”) are just mostly fictions to get a critical mass of adoption in a community.
> As of 2020, the Federal Reserve lowered reserve requirements to ZERO
Because it's no longer the favoured mechanism. Large banks in the US still have capitalisation requirements, and there are various other measures, they're just no longer required to keep a certain percentage specifically in a federal reserve account.
Seems to me the main constraint in the decentralized world is that the bank will have to pay higher interest to other banks, if their own loans start to default at a greater rate than the money being deposited with them. If people stop depositing with that bank, or withdraw their money, or their loans start to default, then the bank's balance sheet will become lopsided and they'll have to pay higher interest to other banks.
Honestly I have no idea! I did listen to a podcast about LIBOR and the various criminal convictions around it sometime earlier this year, and I swear I understood it for a few minutes… but it’s gone now!
> banks (...) might end up sandwiched by competition from (...) Layer 3 stablecoin systems. This is why banks are currently (...) demanding that stablecoins be regulated in the same way that banks are.
...but earlier:
> Thinking of these different layers of money as enforceable ‘chips’ within a legal system helps to highlight that ‘thin air’ is thicker than we may think.
...surely the author themselves here is effectively admitting there are more reasons one might desire regulation and oversight in the crypto space than just stifling competition?
> In reality, a cashless society is a type of enclosure, in which the only form of money in society becomes digital bank chips (a bit like being stuck in a network of casinos where you can no longer exit)
The part about CBDCs is interesting: "The banking sector has been attacking the cash system for decades, but confidence in their Layer 2 chips depends on the public being able to redeem them for state money... In reality, Layer 1 CBDC has existed for decades, but it’s traditionally called ‘reserves’ and is only accessible to banks who use it between themselves"
"banks control the Layer 2 system, but see a future in which they might end up sandwiched by competition from a hypothetical Layer 1 CBDC and Layer 3 stablecoin systems (which admittedly plug into them). This is why banks are currently lobbying against CBDC to water it down (e.g. demanding limits upon its use), while demanding that stablecoins be regulated in the same way that banks are"
"The CBDC debate is really about whether access to digital state money should be extended to all of us"
I shudder to think of a day where the only way to spend and receive money offline is through banking and financial systems (Layers 2-3), which (likely due to today's KYC laws) inevitably require outing your deadname in order to send and receive goods and services. This is already largely the case for online payments, in bank transfers (which in their current dysfunctional state, not only reveal your legal name to the recipient directly, but require you send your order ID and legal name in an email side channel because the chip-transfer message doesn't carry enough information to tell the recipient what the money is for), and PayPal (PayPal business accounts do not actually hide your account-holder name from the money recipient, as I found out by being doxxed after creating one). I've only found a narrow exception where Privacy.com credit cards allow the use of a pseudonym once you've doxxed yourself to Privacy.com, and the small fraction of people on Citi can use True Name Mastercards to pay (and again not receive money).
There is an old trick in the US where after you obtain a credit card in your own name you can obtain a companion card with any name at all on it. It will not protect you if you do any nefarious activity, but if you just want to shop or dine without name recognition then it works just fine. I think I was only asked once to provide personal details for the companion card.
The funny thing is, what he calls “Layer 1 cash” is not the lowest layer. Most cash currencies were issued as tokens which could themselves be reimbursed for gold or silver by the issuing state or bank. The current level of cash (which he tries to defend) is already one level removed from what was originally valued. One could see where gold bugs and silverites get their thinking from.
But, one could argue, if most people really think there’s only one type of money, isn’t that by then by definition, true? I.e. if other people value a “layer 2 digital chip” as much as “layer 1 cash”, aren’t both worth the same to me, since I can get the same worth from them both? And, therefore, why should we care anything about any shift from layer 1 to layer 2, since the shift from layer 0 to layer 1 seems to not be a problem now?
This is a limited view, and is true solely if you look only at the two forms’ notional “value”. Hovever, the differences between the two lie instead in the technical limitations in how they can be used. If layer 1 cash cannot be used by, say, online retailers, or in certain shops, that form might have less value for me, if I want to buy something online or in those shops. On the other hand, if layer 2 digital chips cannot be used without the bank (and state) getting and keeping a permanent log of all my transactions, and also makes it impossible to send money to what either the government or the credit card companies deem to be unsuitable destinations, then I might value that form less.
It all depends on what you, yourself, value, or (by extension), what freedoms and/or conveniences you want society as a whole to have. He chooses to defend “the balance of power” between the two. We must all make our own choices here, and remember that all our actions will affect the balance.
I'm not sure why you're being downvoted here, this is all good sense - if "Layer 2" casino chips are actually more useful to me, and interoperate seemlessly with "layer 1", there seems no particular reason to care about the power struggle the author frames, or even paint it in terms of a struggle.
AFAICT there is no war between the Bank of England and the banks in the UK over who gets to issue the money, no conflict, just the system running as it is designed with various participants in their niche.
The author likes to paint proponents of cashless societies as naive, but to me it looks like they have decided there's a moral component and a battle where it seems really there is none, or at least it is a political/idealogical viewpoint they are superimposing on the situation.
IMHO, if you value financial privacy as an important civic right, the total abandonment of layer 1 cash (which has it) for layer 2 chips (which notoriously lacks it), really is a political and moral issue.
Ok, now explain bad debt expense in this model? And the implication on taxes? How about the secondary market for debts and bankruptcy proceedings? And then capitalizing expenses?
This post just says the same thing everyone understands in the simple model with abstractions based on crypto that attempts to explain group behaviors. How someone goes about reading the incentives and behaviors with the simple model does not mean the model is wrong - multiple choice tests allow people to be right for different reasons.
Edit: and I forgot the softball, the FDIC insurance explains an insane amount about the inherent risks of the system. If you want to know the real “creation of money” if that number ever goes up, you’ll see some wild things.
I'm curious what people who've used AliPay in China think about this. From the little I've heard about it (on a podcast interview[1]) it seems like people refuse cash because AliPay is so strongly preferred. How does that fit into the whole "casino chip society" view?
The problem with this article
is it doesn’t point out that most money is bank deposits already, so taking the cash element away wont make much of a difference to the amount of bank IOU style money.
The bigger issues will be people used to not paying tax by
using cash (usually working class) will suddenly be a lot
poorer which could be a shock. The government may need to mitigate.
And the surveillance aspect of it, where
the
bank system knows every last
cent spent by every last citizen.
There are many many more issues in a cashless society.
Imagine a power outage (sadly, we're getting close to regular ones here in europe)... how will you pay for anything if POS terminals don't work?
Imagine protests like the ones in china now.. (and not that long ago in canada)... protesting.. hungry? Wanna buy a hotdog or noodles? No cash? Use some digital card/app.. there's a paper trail you were there and your account is locked.
Banks wanting to earn a bit more money? Some people spending more money at liquor stores than at fitness stores... that information would be valuable to insurance companies.
Want to buy an XXXL buttplug? Now there's a paper trail from a XXXL buttplug store... government changes (your leader doesn't want to use dolars anymore to sell oil, someone organizes a coup,...), and you're being thrown from a rooftop.
Agree with all these. Except power outage. There is nowhere near enough cash in circulation to take over, not the means to easily access it. See: Lebanon.
Maybe Lebanon is the poster child for needing a more cashful society! Or using gold (not gold standard)
Recently I opened an IRA account at Fidelity. I had my 401k with them for more than a decade. Soon after I opened it they locked my account demanding ID and papers proving my residential address. I'm not sure what else they may request, but fact is I can't use my hard earned funds at this moment.
I experienced similar locks at a bunch of other websites. It looks to be a norm nowadays to randomly lock accounts. Now if similar things start to happen to bank accounts and retirement funds it's easy to understand that it will ruin people's lifes.
Bottom line is - we shouldn't fully rely on electronic money. I will do everything to avoid living in a cashless society.
Fidelity had my 403b account listed under the address of some Brazilian guy who worked for Microsoft when I logged in one time. There’s a reason they do that.
> Digital chips for borrowers: they issue Layer 2 chips to borrowers, in exchange for a loan agreement in which the customer promises to return a larger amount of Layer 1 money to them in future than what the chips promise to them now (in a sense, the bank ‘buys’ a higher-value long-term promise by issuing lower-value short-term promises, but exposes itself to risk in the process).
This is not true. I pay layer 2 chips to pay off my mortgage. I am not sending cash to the bank, they transfer layer 2 chips from my bank account every month.
Not only that, but the central bank never touches layer 1 money either. They also just transfer layer 2 money into banks.
When you pay off your mortgage with L2 chips, your bank settles in lower layer with other banks, so they do actually get L1 chips. Not actually with "cash" but with chips tracked by Fed account for banks. (It's really chips all the way down).
Similarly when you are sending your L2 chips thank bank created for when they granted you your morgage - from your bank to other places, they will want to settle L1 chips as well. The bank will use the value of of your debt to settle it (either sell the loan to someone, including FED or use as a collateral or whatever).
>Remember that a chip is a liability to its issuer. Whoever ends up with those chips can come back to demand cash, so - in the case of a casino - it’s not in their interest to randomly issue huge numbers of chips to customers who don’t actually deposit anything.
At the casino where I used to work one Auditor would pore over slot machine reports tracking down single cent tickets.
People had stuffed their pockets with tickets when out for a night and then forgot about it.
But the auditor had to account for it in case they came back wanting the penny. My mind reeled from the tedium nature of that job.
There was a Bitcoin hostile article published by European Central Bank today. I was wondering why ECB even bothers to write about Bitcoin. Turned out, the author is a fan of CBDCs and taking cash away so that ECB could enforce negative interest rates.
> For example, Dyson and Hodgson (2016) argue that “if digital cash is used to completely replace physical cash, this could allow interest rates to be pushed below the zero-lower bound.” Rogoff (2016) develops this argument in detail. By allowing to overcome the zero-lower bound (“ZLB”) and therefore freeing negative interest rate policies (“NIRP”) of its current constraints, a world with only digital central bank money would allow for – according to this view - strong monetary stimulus in a sharp recession and/or financial crisis. This could not only avoid recession, unemployment, and/or deflation but also the need to take recourse to non-standard monetary policy measures which have more negative side effects than NIRP. Opponents of NIRP will obviously dislike this argument in favor of CBDC, and will thus see CBDC potentially as an instrument to overcome previous limitations of “financial repression” and “expropriation” of the saver.
> In sum: it seems that the remuneration of CBDC is per se neither necessary to clear a market, nor to control inflation, in analogy with the case of banknotes, which also cause none of these issues8. However, still, the ability to remunerate CBDC, in contrast to banknotes, is a privilege that has a number of advantages. It allows shifting the interest rate on CBDC in principle in parallel to monetary policy rates, such as to avoid that the relative attractiveness of CBDC relative to market- and central bank policy rates depends on the absolute level of interest rates, as it is the case for banknotes. Indeed, the fact that the remuneration of banknotes stands at zero regardless of whether short-term risk-free rates are at 10% or at -0.5% (as currently in the euro area) may be perceived as an anomaly, which becomes increasingly problematic when the zero lower bound is being approached or passed. Moreover, a negative remuneration of CBDC also allows addressing the possible danger of a run into CBDC in case of a systemic banking crisis (as also noted by Kumhof and Noone). As shown in section 4, in the 2008 banking-, and 2011/12 euro area debt crises, a run into banknotes played only a rather minor role, relative to the run from perceived weak to perceived strong banks – despite the fact that the remuneration of banknotes remained at zero, and that the level of short term risk free rates quickly approached this level after the Lehman default, reducing the opportunity costs of holding banknotes. Nevertheless, since a run into CBDC would be easier, it would be recomforting to have as extra tool the ability to impose negative rates on CBDC.
This kind of money tinkering sits at the opposite of the political spectrum of Bitcoin, regardless if you like Bitcoin or European Central Bank.
There is another reason that cashless society is awful that was not talked about in this article, but I think is just as important - a digital dollar means that you have a dollar where it is impossible to commit crime. While that sounds like a good thing (who wants crime?), it very much stops being a good thing as soon as you bump up with laws that go against your morals. Designing systems with the assumption that we will always have democratic and free government is a horrendous idea, allowing the government to have a complete record and log of every single transaction you ever make, as well as having the ability to stop you using digital money, makes it so easy for fascists.