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[00:01:01] Only when the government demonstrated its determination to keep monetary growth in check.
[00:01:06] This is the Debunking Economics Podcast with Steve Keen and Phil Dobbie.
[00:01:14] Well, that was Milton Friedman trying to link the money supply to inflation.
[00:01:19] This is all in Japan, of course. It took a year for the growth in the supply of money to result in a very high inflation rate.
[00:01:26] And then as they reduced supply, it took another year, actually five years for inflation to come down.
[00:01:31] In his words, five years to squeeze inflation out of the system.
[00:01:35] Could be a coincidence, of course, when you're talking about such big time lags.
[00:01:39] But there again, prices will come down if you slow the economy far enough by taking all the money out of it.
[00:01:45] But none of that is a problem on our island of coin utopia because as we discussed last week, the money supply is very heavily controlled.
[00:01:53] But that's about to change.
[00:02:00] Last week, we talked about the remote island of coin utopia where the only currency was gold coins.
[00:02:05] There were no notes. Banks couldn't live give loans.
[00:02:09] Governments could only spend money they got in tax.
[00:02:12] And the chancellor, who's Rachel Reeves, who's been banished to this island for some reason, has been wondering why the economy is not growing again.
[00:02:20] She did that in a much bigger place earlier.
[00:02:22] And now she's hitting the problems again.
[00:02:25] She's tried minting new coins.
[00:02:26] We talked about that last week.
[00:02:29] That only worked for a little while.
[00:02:31] So basically, in that environment, the economy is ultimately just going to keep slowing, isn't it?
[00:02:38] If you're not putting extra money in, you've only got the same money circulating.
[00:02:44] We realized that this island of coin topia was actually invented by Milton Friedman in 1956.
[00:02:50] And it has a little flag.
[00:02:52] It flags as the ultimate quantity of money.
[00:02:54] So we're talking about this little fictional world that Milton invented.
[00:02:57] And it had a little extra restriction, which one might call an unrealistic assumption.
[00:03:02] Heaven forbid that economists would make unrealistic assumptions.
[00:03:05] But that was that there's no capacity to create new capital.
[00:03:10] Now, that is, of course, complete bollocks in the world in which we have lived, where growth is, you know, there's no perceived limits to growth.
[00:03:18] So you just basically go, you know, you have capital equipment, you have labor.
[00:03:23] Both are growing.
[00:03:24] So in most cases of, you know, any country around the world, most countries had a growing population and they had a growing amount of capital.
[00:03:31] And the way they had a growing amount of capital was you used money, which you might otherwise be using for buying existing goods and services.
[00:03:37] You devoted some of that to inventing new processes.
[00:03:40] And this is where we need to take leave of Milton Friedman, who had taken leave of his censors sometime before he wrote that paper, and jump across a rather more rational man called Joseph Schumpeter.
[00:03:51] And Schumpeter made a much more realistic set of assumptions.
[00:03:56] This is the thing which, you know, I love the little world you set up with Cointopia because it was so much what Milton Friedman argued to bring in monetarism.
[00:04:05] And the crazy thing is even though people use the word monetarism to describe it, Milton Friedman's point was that money doesn't matter.
[00:04:13] He said all the money does is change the price level.
[00:04:16] But to reach that conclusion, he had to assume that money can't change the amount of capital in existence.
[00:04:20] Now, that is crazy.
[00:04:22] This is the sort of crazy assumption that neoclassical economists have been making ever since their theory began.
[00:04:29] But why does he make that assumption?
[00:04:31] Is it because – and we'll go back to Schumpeter in a second –
[00:04:33] He had a political agenda.
[00:04:35] Right.
[00:04:35] Okay.
[00:04:35] But is he also thinking, well, if we've only got a certain amount of money going around and people are buying – using it to buy the stuff they need, there's no – there's nothing left to invest in something else new.
[00:04:47] He assumed an economy in long run – what he called long run general equilibrium.
[00:04:51] Now, that's exactly the situation the world was in in 1932, of course.
[00:04:55] Not.
[00:04:56] Okay.
[00:04:57] So, he chose a completely unrealistic starting point of saying, what if you're at the ideal situation that a market economy on its own without government, without money, without money creation because he had the money in existence but no way to create it?
[00:05:11] What's the ideal amount of money in that world?
[00:05:14] And basically, the amount of money you've already got.
[00:05:16] Okay.
[00:05:17] Any – because you're already in equilibrium.
[00:05:19] You've got zero inflation.
[00:05:20] You have no capacity to create new capital.
[00:05:23] There's no capacity to create new people.
[00:05:25] I don't know what the – maybe all the inhabitants of Cointopia are male economists.
[00:05:30] Male economists.
[00:05:31] That'd be – that'd be – actually, I'm now suddenly warming to the idea.
[00:05:35] The economists can't procreate.
[00:05:36] I don't –
[00:05:38] Yeah, yeah.
[00:05:38] Well, they can't – well, they can fuck each other but they can't procreate.
[00:05:41] Is that allowed on this radio show?
[00:05:42] I think so.
[00:05:43] Yeah.
[00:05:44] I think – yeah.
[00:05:45] I don't need anyone from Apple's listening so I think you're in the –
[00:05:47] I'm liking the idea already.
[00:05:48] But anyway, so with that world, there was no capacity for money to create.
[00:05:53] Even the existing money was just used for transactions and there was no money, new money creation nor was it possible to use that money for creating capital.
[00:06:03] But that's – the reason he put it forward was Milton Friedman's objective throughout his career was to prove that first of all, the velocity of money is constant.
[00:06:12] So his major intellectual work was the monetary history of the United States and I've forgotten his collaborator.
[00:06:19] You know, done with a female collaborator.
[00:06:23] But it was Friedman and Schwartz I think.
[00:06:26] I'm not sure but I think.
[00:06:29] And he was really cooking the books because to find that velocity was constant through the data stream he did, he was doing all sorts of manipulations of the data, which as I mentioned in the previous podcast on this point, two of his successors in a sense, Kittlin and Prescott, did a much more sophisticated data analysis.
[00:06:46] So using what's called a Hodrick-Prescott filter to distinguish the trend from the cycles around the trend.
[00:06:54] The trend is invented anyway, but the cycles were you'd fit a curve line through the data and then the – you would assume, which is not such a bad assumption, that the cycles in the actual world were the deviations from this line of best fit, a smooth line of best fit done through the data.
[00:07:13] But when they did that, they found velocity was highly volatile as we spoke about in the previous podcast.
[00:07:18] So Miltman was doing these things to reach a political agenda which say inflation is always and ever a monetary phenomenon.
[00:07:24] Money is only created by the government.
[00:07:26] Therefore, inflation is the government's fault.
[00:07:27] That was his agenda.
[00:07:29] And he got away with it.
[00:07:30] People swallowed that nonsense.
[00:07:31] But I mean following its logic, if you've got a – say there's a billion gold coins in circulation in Coinucopia and then somebody thinks, oh, I've got a brilliant idea.
[00:07:40] I'm going to spend 100,000 of those gold coins or 100 million, let's call it.
[00:07:48] So a billion in circulation.
[00:07:50] Someone goes, I've got a fantastic idea.
[00:07:51] I've got 100 million that I'm going to inject into this – into developing this new bit of capital which is going to make life so much better.
[00:07:59] It's going to make more stuff for everybody.
[00:08:02] And so we're going to have economic growth as a consequence of that.
[00:08:06] But so 900 million is now in circulation while he's got that tied up.
[00:08:10] Although then the money spending is going to be in the economy generally anyway.
[00:08:13] But once that machine's there, once that capital's there, there's still only a billion gold coins going around.
[00:08:20] So even though he might have produced something that makes more stuff for people to consume, they've still only got so much money.
[00:08:27] So the economy can't grow because people haven't got more money to spend unless it makes people spend faster.
[00:08:32] And in which the people have got – prices have got to fall because of an innovation.
[00:08:36] So that's another very good point.
[00:08:39] The whole perspective, even if you're allowed for capital creation in that world, of Milton's world, then you've got to use existing money,
[00:08:47] not to spend it on the normal commodities you might buy as a consumer, but you've got to now become an investor and you've got to try to buy –
[00:08:55] you've got a fully employed economy.
[00:08:58] So you're going to be effectively – by pulling some of that – the money is going to circulate,
[00:09:04] but by pulling it out for a while you're going to slow down its velocity of circulation and use it for things which are investment goods rather than consumption goods.
[00:09:13] So consumer demand may appear to fall in the aggregate.
[00:09:19] So deciding to innovate causes a mini slump in the Cointopia world.
[00:09:26] And this is just not how it happens.
[00:09:30] But if the end result, though, is, as you say, that there's more stuff for people to buy, that's going to make prices fall.
[00:09:37] Yeah, that's probably going to have deflation coming out of innovations, yeah.
[00:09:40] Right, which is not a good outcome, is it?
[00:09:42] Because the ultimate upshot of that is the next time someone has a bright idea, they'll go, well, if I do this, then it's going to devalue stuff.
[00:09:48] I'm not going to get the returns I expected for this.
[00:09:51] There's actually no incentive for innovation.
[00:09:52] You're going to have more commodities circulating with the same amount of – a fixed amount of money supply and, with more than some assumption, circulating at the same rate.
[00:10:01] So, therefore, the average price for all products has to fall.
[00:10:04] And, in fact, again, you have to read this – I don't know why they use the word shit because that's so impolite on radio.
[00:10:12] But you have to read these articles to see just how crazy the assumptions are.
[00:10:17] The assumption is right.
[00:10:18] The assumptions are right, though, in an environment like Coinucopies.
[00:10:24] We do not have never lived in Cointopia because the thing you want to talk about today is introducing a bank to create money by creating loans.
[00:10:33] Yeah, yeah, exactly.
[00:10:33] But, exactly.
[00:10:34] I mean, that's the whole idea.
[00:10:35] I mean, Coinucopia is a crazy place to live.
[00:10:36] But, okay, so Rachel Reeves in that situation where she's saying, oh, my goodness, we've got deflation because we've got all these innovative ideas that are creating more stuff.
[00:10:45] How logical, even before she gets onto bank loans, that would be the point at which she says, okay, I've got to put more money into the economy.
[00:10:50] You've got to create more money.
[00:10:51] Yeah, yeah.
[00:10:52] I find this – when I see people on Twitter saying this, I mean, I'm sorry, I'm not normally as arrogant as I – well, I'm not normally all that arrogant.
[00:11:03] But when I read stuff and people say, create money always creates inflation.
[00:11:08] I think, oh, do you think you live in an economy that never changes in size?
[00:11:11] I mean, let alone grows.
[00:11:13] I mean, so that people will say, oh, government money – money creation causes inflation.
[00:11:17] It causes inflation, even if you accept their precepts.
[00:11:21] It causes inflation only if the money's price grows faster than the rate of economic growth.
[00:11:26] People don't even seem to factor it a little bit into their thinking.
[00:11:28] Not people.
[00:11:29] Well, I think that's the great thing about Coinucopia.
[00:11:31] I think we've just explained why that works.
[00:11:33] Yeah, because there are –
[00:11:34] In a very simple way.
[00:11:35] Fixed number, you can't change it.
[00:11:36] So that's – the economy can't grow either.
[00:11:39] Now, we're talking about an economy where you have an innovator who wants to grow.
[00:11:42] The best person to throw Milton Friedman, get some exercise out of it, try to win the shot putt championship somewhere.
[00:11:49] Throw a shot putt at the way.
[00:11:51] Get hold of Joseph Schumpeter's theory of economic development.
[00:11:54] And that's a far more realistic artificial economy in which banks lend to entrepreneurs.
[00:12:03] So the only role that Schumpeter allows for banks is to lend money to entrepreneurs.
[00:12:09] And he doesn't properly cover the fact that a fair number of entrepreneurs fail.
[00:12:14] But he makes a point once a successful – once an entrepreneur with an idea which is going to succeed borrows the money to finance a new investment, then he creates that money.
[00:12:25] So what you've got is an increase in – because the bank gives him a loan, the loan increases the amount of money in his deposit accounts.
[00:12:31] It increases the amount in his loan account as well identically.
[00:12:34] That's how money is created by private banks.
[00:12:36] And then with new money injected into the economy, he goes about and employs – takes resources away from some of the existing companies.
[00:12:44] So a major point in Schumpeter's – which was – he made assumptions made it more difficult for him to reach his conclusion.
[00:12:51] He first of all assumed that only new – only people who currently don't run a company are entrepreneurs.
[00:12:58] They come up with a new idea.
[00:12:59] They have a new idea but no money.
[00:13:00] So it's not looking at an existing company reinvesting out of cash flow.
[00:13:04] The ideas, I assume, come from new entrants into the business.
[00:13:08] And that actually makes it harder for him to make his point.
[00:13:11] And that's one thing I respect about Schumpeter and I loathe Friedman because Schumpeter's assumptions effectively made it harder to explain where innovation came from because he ignores one existing source of innovation, which is new ideas by existing companies.
[00:13:27] So he made his task of explaining it harder.
[00:13:28] Then he said, I'm also going to assume the economy is fully employed.
[00:13:32] That's the same thing Friedman did in his artificial optimal country of money, Ireland, where the helicopters flew over.
[00:13:42] But what Schumpeter does is say that it's fully employed and therefore if you want to hire resources from other sectors, you have to pay higher wages and higher rental costs for capital equipment.
[00:13:55] Therefore, you cause inflation.
[00:13:57] This is the opposite of Milton Friedman's arguments.
[00:14:01] When the borrowed money is first spent because you've got an injection of new money into just the existing capacity of the economy, you cause inflation out of the initial.
[00:14:09] And this is what we saw, okay, in the 1990s with the telecommunication bubble, in the 2000s with the internet bubble and also, of course, in terms of prices of assets with the subprime bubble.
[00:14:23] There was an increase in prices.
[00:14:25] The first effect of innovation, creating the new money, the new product is to drive prices up, not down.
[00:14:31] So the opposite of Friedman's.
[00:14:32] And it's because Schumpeter's assumptions are, in a sense, realistic.
[00:14:38] They're attacking the fact that banks do create money, which Friedman completely ignored.
[00:14:42] And all his so-called followers also completely ignore banks create money.
[00:14:46] They still stick with the myth of loanable funds.
[00:14:48] Schumpeter was one of my predecessors who said banks create money by creating loans.
[00:14:52] So you then boost economic activity when you start spending.
[00:14:57] And it's a generic boost in activity because as well as you're buying capital equipment and raw materials and so on, you've also got workers that are going to the sushi bars and buying sushi.
[00:15:08] So the price of sushi, demand pressure on sushi will rise.
[00:15:12] But then he says when you bring the product into existence, you then cause the opposite effect because suddenly you either have a product which is taking demand away from other product
[00:15:22] They now want this shiny new thing called an iPhone rather than the old-fashioned Nokia they had beforehand.
[00:15:29] And that takes demand away from existing products.
[00:15:33] So that – pardon me.
[00:15:36] That means that effectively you are causing deflation.
[00:15:39] So there's initial increase in prices courtesy of the increase in money and bidding up input prices as a result because people are using that money to buy something, both labor and machinery imports and raw materials.
[00:15:53] Then when this thing is produced, it comes out in the market.
[00:15:55] It undercuts.
[00:15:56] It either undercuts an existing product so it's the same sort of thing made more cheaply or it just diverts demand from existing products because it's the bright new shiny thing everybody wants to have.
[00:16:06] Nobody wants flip phones anymore.
[00:16:08] They now want flat phones with touch surfaces like you have on the iPhone.
[00:16:16] Or whatever.
[00:16:17] So if I – so, I mean, if I invented the polystyrene car, for example, and polystyrene currently –
[00:16:23] That's a good one.
[00:16:24] Polystyrene is only used at the moment for packaging.
[00:16:26] And then all of a sudden I say, right, this car, to manufacture I need heaps of polystyrene.
[00:16:31] Obviously, the price of polystyrene will shoot up.
[00:16:34] Then they go up.
[00:16:35] But then polystyrene manufacturers will go, oh, well, we need more polystyrene machines.
[00:16:40] So they invest –
[00:16:41] You have a feed-through to the entire economy.
[00:16:43] You cause a boom.
[00:16:44] That's right.
[00:16:44] But at the end of the day, we've got lots of polystyrene cars.
[00:16:48] Well, they take away demand for non-polystyrene cars.
[00:16:51] Everyone's going, I love the way they just fall apart in the rain.
[00:16:56] Or I love the way if I hit –
[00:16:57] Yeah, the shocker – the car is your shock absorber.
[00:16:59] That's very nice.
[00:17:00] If I hit someone, then they just dent the polystyrene.
[00:17:02] I can see the modern mob having collision competition.
[00:17:06] Yeah, there's going to be no one –
[00:17:06] Polystyrene going everywhere.
[00:17:08] So – but, okay, the deflationary effect, though, because after that, I've invested.
[00:17:12] I've created something.
[00:17:13] And we can make polystyrene cars much faster so more people can have cars now than they've ever had before.
[00:17:18] But to do that, they've got to have the money.
[00:17:21] So the economic growth that's been created by more people getting involved in the polystyrene manufacturing and all the other processes involved might still not match the ability to pay for the extra cars that I've produced.
[00:17:35] So you still need – even beyond the loans that have been taken out by the banks, which has expanded the money supply – you still might need extra money in the money supply anyway to see that growth, mightn't you?
[00:17:45] Well, yeah.
[00:17:45] I mean, because we'd have a contest between growth of the nominal money supply and growth of the real economy.
[00:17:52] And this contest has been going on for – not by millennia, but certainly centuries.
[00:17:57] And then you'll get increases and decreases in price coming out of that.
[00:18:01] Not that I'm saying money growth alone causes inflation.
[00:18:03] There's got to be a decision to put up prices that cause inflation.
[00:18:06] But, yeah, you have this dance between the two, the nominal and the real, and what the neoclassicals ignore.
[00:18:13] Well, the inflation in the case of the polystyrene was not anything to do with the money supply.
[00:18:18] It was the ability of polystyrene making machines, wasn't it?
[00:18:20] Yeah, and also you're then reducing – as well as causing – you might undercut the existing cars or you might force the existing cars to cut their prices.
[00:18:31] So you affect the profitability of other sectors.
[00:18:34] And you – but in terms of the workers themselves, you find workers' demand.
[00:18:38] You've hired more workers.
[00:18:39] So the level of demand in that sense can actually rise.
[00:18:43] So there's a – the innovation has – you know, innovation has been – the essential feature of capitalism has been evolution and innovation, not bloody equilibrium.
[00:18:56] So the neoclassicals have plowed the law.
[00:18:58] And it's – I mean, I think you used the term race.
[00:19:01] It's a race between the supply of money and the growth in the economy.
[00:19:05] And you can't have – you can't have one without the other.
[00:19:07] You will have cycles.
[00:19:08] So in that situation – you will have fluctuations as a result.
[00:19:09] Yeah, cycles are inevitable.
[00:19:11] And in that case with the polystyrene cars, if you had loads of cars and people couldn't afford them right now, you'd get more people taking out loans to buy those cars.
[00:19:18] And that would help extend the money supply as well.
[00:19:21] So look, that brings us to the end of part one quite neatly.
[00:19:25] Clearly, clearly, this has all been explained now to Chancellor Reeves.
[00:19:30] And she says, okay, better allow bank loans in that case.
[00:19:34] So we'll look at how she does that, because she doesn't do very well in the first place.
[00:19:38] But we'll see if we can get her there by the end of the podcast.
[00:19:40] Back in just a moment on the Deep Banking Economics Podcast.
[00:19:42] Me and Steve, stay with us.
[00:19:52] See you next time.
[00:20:19] This is the Debunking Economics Podcast with Steve Keen and Phil Dobby.
[00:20:27] So, Steve, Chancellor Reeves suddenly announces this radical departure that people can now borrow from banks.
[00:20:36] So, in effect, for as long as they have debt, people have a bit more money.
[00:20:42] And that obviously helps the economy along for the growth reasons that we've been talking about.
[00:20:48] But, to start with, she says, banks can't issue notes.
[00:20:53] They can only lend out coins.
[00:20:55] So, one bank has 100,000 coins deposited in it.
[00:20:59] That's one-tenth of the money supply.
[00:21:00] There's five banks, all equal in size.
[00:21:02] So, there's 500,000 coins deposited.
[00:21:05] And the other 500,000 is in circulation.
[00:21:07] So, a million coins on this island in total.
[00:21:11] So, half a million in people's pockets, in shop tills, on the mantelpiece, under the bed, wherever.
[00:21:17] But if I borrow from the bank where the bank can't issue notes and double entry bookkeeping is still not allowed,
[00:21:25] then I'm just taking someone else's money temporarily.
[00:21:27] It's not adding to the money supply in any way.
[00:21:29] So, she's failed on that count just by saying that they can issue loans.
[00:21:34] Because it's going to make, in that example, it's going to make no difference whatsoever, is it?
[00:21:38] You said right.
[00:21:39] If the banks, I mean, you actually got an extended version of what they call loanable funds.
[00:21:46] Because in the model of loanable funds, what you have going on is one non-bank loans to another non-bank.
[00:21:53] So, the loans are fundamentally non-bank loans.
[00:21:56] And that is a fiction because there are some non-bank loans, sure, but the majority of loans are created by banks.
[00:22:04] So, it's still not a realistic model of modern capitalism.
[00:22:07] But if that was the case, that banks were only allowed to lend out coins,
[00:22:12] and they had to have the coins deposited in the first place to enable it,
[00:22:16] and they also could not write a book entry,
[00:22:21] and you wouldn't have deposit accounts for people.
[00:22:24] You'd have a deposit account representing the amount of coins that they deposited with you.
[00:22:28] But if you lent the money out, part of that money is not there anymore.
[00:22:33] Okay?
[00:22:34] So, people, in other words, you couldn't have demand deposits.
[00:22:37] And this is the fallacy in how loanable funds people think about the banking system.
[00:22:43] Because what we have is demand deposits.
[00:22:45] You deposit, you know, 1,000 coins in your bank in Cointopia,
[00:22:51] and then the bank gives you a receipt saying you've got 1,000 coins there.
[00:22:54] And at all times, you have to have instant access to that.
[00:22:57] There's short-term liability.
[00:23:00] You have a short-term asset, which is your bank account.
[00:23:03] The bank have a short-term liability, which is your deposit.
[00:23:05] They must honor that liability if you ask for the coins back.
[00:23:09] But if you're going to be lending the money out to somebody else, then the coins have to fall.
[00:23:14] So, you put 1,000 coins in, and you find a short time later there's only 900 available,
[00:23:18] because the bank has lent out 100 of them.
[00:23:21] So, that means effectively your coins are no longer demand deposits.
[00:23:26] They're term deposits.
[00:23:28] And the only way that model works is if term deposits apply.
[00:23:31] So, if in this scenario the banks say, well, okay, I mean, is this where, in this scenario,
[00:23:37] does the money, you know, the argument for the money multiplier?
[00:23:41] I mean, this is where it comes from, isn't it?
[00:23:42] That if I deposit those 100,000 coins, the bank says, and we're still talking coins,
[00:23:48] the bank says, well, okay, we'll keep 10,000 of them just in case you come back.
[00:23:53] But we're going to loan out 90,000 of them to somebody else.
[00:23:56] So, somebody else gets those 90,000, puts it in their bank.
[00:23:58] Their bank goes, okay, that's 90,000, let's keep 10,000 of them,
[00:24:02] and we'll loan out the other 80,000.
[00:24:05] And so, we'll loan out nine, and we'll loan out the other 81.
[00:24:08] And so, it goes on.
[00:24:09] So, we get all of this supposedly new money.
[00:24:15] But is it actually new money?
[00:24:18] This is a point which I'm writing up a new book, as you probably know.
[00:24:23] Yeah, because it's still only the same amount of money in circulation.
[00:24:25] Yeah.
[00:24:26] Well, the only way it works is this is the money multiply collection.
[00:24:30] This is what people learn in the economics class.
[00:24:33] And then, so they show, here's the magic way that banks create money.
[00:24:36] And once we've explained that, we're going to talk about the economy and ignore banks and debt and money.
[00:24:41] So, what they go through is a dual process of brainwashing.
[00:24:44] First of all, they learn this model, which, as I'll explain in a moment,
[00:24:47] only makes sense under very peculiar circumstances.
[00:24:50] And secondly, they then get taught this thing as money illusion.
[00:24:55] Money really doesn't matter, my young economic student.
[00:24:58] Therefore, we teach you this straight away,
[00:25:01] that doubling all prices and all incomes simultaneously has no effect on the economy.
[00:25:05] Therefore, money has no effect on the real world, only has effects on nominal prices.
[00:25:10] And therefore, when we're doing a model of the real world, we can make macro models that leave out banks and debt and money
[00:25:15] and keep on in your brain.
[00:25:16] Oh, sorry, your educated path towards being a professional.
[00:25:20] I feel like I can't.
[00:25:21] Brainwash just pops into my mouth immediately when I think of neoclassical economists.
[00:25:25] But they believe that they've got a theory of how money is created, but money then plays no further role.
[00:25:30] They never go back and examine the conditions of the model they were taught about money.
[00:25:34] They say, well, what is actually required for this to work?
[00:25:36] Which we're going to do.
[00:25:37] Right, okay.
[00:25:38] So there's that process then.
[00:25:39] So it's all coins.
[00:25:41] So those people reading those textbooks will be very happy with that.
[00:25:45] They probably should move to Coinucopia because life is very simple there.
[00:25:49] What's to stop this bank that has 100,000 coins and just keeps 10,000, passes on 90,000,
[00:25:57] and then that goes into bank number two, and then that gets lent out?
[00:26:01] What's to stop that actually happening in reality?
[00:26:04] Well, the only way it works, and this is why you're having CoinTapy as a good start,
[00:26:08] is all the transactions of the economy initially are only with money.
[00:26:14] So we have to take a step back.
[00:26:16] You've got these coins in existence.
[00:26:17] They're circulating in the economy between the government, the private sector, the central bank, the banks.
[00:26:24] And if you go here, if you put 100,000 coins, you deposit 100,000 coins in your bank, okay,
[00:26:30] and then you have a demand deposit, and you can actually demand that money back.
[00:26:35] But the bank says, okay, we've got 100,000.
[00:26:37] We're going to lend out 90.
[00:26:38] Now, the only way they can do that is if the loan they make to the borrower is in coins
[00:26:44] because if they try to make a deposit account entry, then they show the coins they've got go down.
[00:26:57] They can't, therefore, show the deposits they've got going up.
[00:27:00] So the only way they can lend out coins in this world and make it work is they have a bunch of coins in their own possession,
[00:27:07] and they lend them to somebody, to a borrower.
[00:27:12] So their coins go down.
[00:27:13] The borrower's coins go up.
[00:27:15] The borrower then walks out the door of the bank with 90,000.
[00:27:18] You walked in with 10.
[00:27:19] You know, you came with 10 will borrowers full of 100,000 coins.
[00:27:23] The borrower leaves with nine full of 90,000 coins and then takes those coins and deposits to the next bank,
[00:27:30] and then you have that bank handed on to 9,000, lends out 81,000.
[00:27:35] Each time they're doing it, they're replacing the 90% of coins they've lent out
[00:27:42] with an equivalent amount of deposit account loans – or, sorry, equivalent account of debt.
[00:27:49] And the only way that works is if the – first of all, all the coins in all transactions with the central bank are in coins.
[00:27:56] And secondly, if you – the demand – they resist the demand deposit.
[00:28:01] So they've lent out that – you've deposited 100,000.
[00:28:06] They've got 90,000 of that.
[00:28:08] So there's only 10,000 of coins left.
[00:28:11] It's got to be balanced by the 90,000 loan that they make to the other person,
[00:28:16] and that then means your demand deposit remains constant.
[00:28:19] Initially, when you put your 100,000 coins into the bank, it was backed by 100,000 coins.
[00:28:24] Now it's backed by 10,000 coins plus 90,000 in loans.
[00:28:28] So the loans are being created, and therefore the deposit accounts remain constant.
[00:28:32] Now that means that you could use your deposit account to buy something off somebody else.
[00:28:36] So we start having a mixed commerce on the island where people are either shopping with coins
[00:28:42] or they're shopping by transferring deposit account, consequent –
[00:28:47] Because that extra –
[00:28:49] Between each other.
[00:28:50] Because there is, in theory, more money supplied.
[00:28:52] There's the same number of coins, but the bank –
[00:28:55] so long as nobody goes and asks for those coins back,
[00:28:58] the bank is saying, well, okay, so we've got that 100,000 is 100,000 plus 90, plus whatever, plus 89.
[00:29:06] It all gets added together, and that's the money supply.
[00:29:09] But most of that money supply is not actually active
[00:29:12] because it's sitting in, theoretically, in bank deposits,
[00:29:16] although only 10% of it is real money because most of it has been passed on to credit.
[00:29:20] But the bank's safe.
[00:29:21] Let's get back to the point.
[00:29:22] If you're working with a totally coin-based world,
[00:29:25] and you imagine your bank start with no loans, okay,
[00:29:31] then all the coins are in circulation.
[00:29:33] So you've got a million coins in circulation.
[00:29:36] You say a million or a billion?
[00:29:37] Well, there's interesting.
[00:29:38] I can't keep some changing.
[00:29:39] But thanks for paying attention.
[00:29:41] Okay.
[00:29:43] Let's say you're a large borrower.
[00:29:46] You've deposited 10% of the country's money supply.
[00:29:48] So you've got 100,000 coins into the bank,
[00:29:51] and there's a million in circulation.
[00:29:52] When you do that, you now have –
[00:29:55] initially, it starts with 100,000 coins also in the banking sector.
[00:29:59] Then they lend out –
[00:30:01] they've got to lend the coins back to somebody else
[00:30:03] who then takes them to another bank and deposits them again.
[00:30:06] And what you slowly get is, over time,
[00:30:09] those 100,000 coins end up all back in the bank's vaults once more,
[00:30:14] but they've created a million dollars' worth of demand deposits.
[00:30:19] They haven't created the demand deposits.
[00:30:21] They've meant that the assets backing the demand deposits have gone from being
[00:30:25] a million – 100,000 in coins, which you had initially,
[00:30:30] to 100,000 in coins plus 900,000 in loans.
[00:30:34] And those loans then maintain the deposit accounts of all these people who have been doing this.
[00:30:39] So, hey, presto, you've turned 100,000 coins into 100,000 coins in the possession of the banks,
[00:30:48] plus $900,000 of deposit account money that should now be used for commerce.
[00:30:55] So when the process ends, all commerce is no longer exchanging gold coins because they're all in the vaults of the banks.
[00:31:01] It's now exchanging deposit accounts.
[00:31:03] And that's how people see the money multiplier working because that's the way they've been taught,
[00:31:10] based in this coin-based cointopia.
[00:31:13] But let's look at the real world.
[00:31:17] If banks all of a sudden are able to issue notes, promissory notes,
[00:31:24] and my understanding is the way notes actually started is because of the days of gold merchants, basically.
[00:31:34] People would be depositing money with gold merchants,
[00:31:36] and the gold merchants would say, okay, here's a receipt.
[00:31:39] And then they realized, actually, and then those receipts became quite valuable
[00:31:43] because it's a bit burdensome to trade gold by carrying it around with you.
[00:31:48] So if there was a reputable gold merchant, you'd deposit with him.
[00:31:52] He'd give you the note of guarantee, and you'd say, okay, that's good enough,
[00:31:58] and people accepted that.
[00:31:59] And then the gold merchants start to realize, well, actually, I can actually issue notes.
[00:32:06] I'm afraid you've jumped from Milton Friedman into a textbook,
[00:32:09] which is not much of a change, frankly.
[00:32:10] But, okay, so that is not how it started?
[00:32:13] That's the textbook model.
[00:32:13] Right.
[00:32:14] No, I mean, I'm not an expert on the anthropology and the history here.
[00:32:18] I'm relying on colleagues of mine who also, David Graver wrote Debt the First 5,000 Years.
[00:32:24] Felix Martin wrote Debt the Unauthorized Biography.
[00:32:29] And Jane Gleeson, I can't think of the name, Gleeson White,
[00:32:33] Jane Gleeson White wrote Double Entry.
[00:32:36] And I think those three books are a great foundation to understanding
[00:32:40] how this process actually began.
[00:32:42] And the idea that gold merchants turn into banks isn't quite right
[00:32:45] because commercial entities financing international trade
[00:32:50] and financing domestic trade with notes of, you know, promissory notes
[00:32:54] was a common feature, you know, certainly from 15th century on
[00:32:58] with the Italian banking after the invention of double entry bookkeeping.
[00:33:02] So banks offering us commercial houses is the world in which money evolved from credit.
[00:33:10] This is the point that actually is a nice little tweet from the David Graber Institute
[00:33:14] a few days ago saying that, which is Chris O'Priest,
[00:33:17] that what we think is that we first of all had barter,
[00:33:22] then we had gold coins, then we had money, and then we had credit.
[00:33:26] And David said that it was the other way around.
[00:33:29] We started with credit.
[00:33:30] So credit was the foundation of the Sumerian banking system.
[00:33:34] Then we invented gold money.
[00:33:36] So we had things like the coins being invented by the Romans and Greeks and so on.
[00:33:40] Then we had barter in some cases coming out as a,
[00:33:45] like a modern means to circumvent things like, I don't know,
[00:33:49] controls on Russians perhaps in terms of gold.
[00:33:52] You know, so you can't export the gold, the oil, so the money.
[00:33:55] So you do a barter trade instead.
[00:33:58] So the initial, the foundation of money was credit.
[00:34:02] And so credit systems existed.
[00:34:04] Gold coins have existed at various times in history.
[00:34:07] And actually two of my favorite, well, I've got some complaints about Henry Ford,
[00:34:13] but Henry Ford and, oh God, the, I can't think of his name all of a sudden,
[00:34:19] the innovator of the electric light bulb, Edison, Edison and Ford,
[00:34:24] both understood that governments create money.
[00:34:27] And they both understood that banks create money.
[00:34:30] And they argued for building a thing called the Muscle Shoals Power Station using government-created money
[00:34:36] because the whole expense of this comes from paying interest.
[00:34:39] And he said, you shouldn't be paying interest on a national resource.
[00:34:42] We can, we need this.
[00:34:43] The country needs the power.
[00:34:45] We can build it with government, with fiat money.
[00:34:47] There's no interest payments.
[00:34:48] It'll be much cheaper.
[00:34:49] Do you do it using the government money creation systems?
[00:34:52] They're aware of the money, money creation issue.
[00:34:55] But the morons who write the textbooks today, and pardon me,
[00:34:58] they may have been bright when they went to economics degree.
[00:35:00] They've had a frontal lobotomy while studying mainstream economics.
[00:35:03] They lose knowledge of how banks actually operate.
[00:35:06] Right.
[00:35:06] So let's, let's, yeah.
[00:35:08] Yeah, so banks create money and, okay, governments do as well.
[00:35:10] But we'll, let's park the government one for now because it's more,
[00:35:14] I feel like it's more complicated to explain.
[00:35:16] But let's just look at this idea of the promissory or promissory note.
[00:35:22] How do you pronounce it, by the way?
[00:35:24] Promissory.
[00:35:25] Promissory.
[00:35:25] I think.
[00:35:25] Okay.
[00:35:25] All right.
[00:35:26] So the idea that you can exchange a physical coin on this island for promissory or promissory notes
[00:35:37] is because obviously somebody trusts you.
[00:35:41] So the idea of we'll give you a note to cover something that we've got that you store
[00:35:46] because you trust us is where that thinking, where that textbook thinking that you just pulled me up on came from.
[00:35:51] But if you were to say, well, okay, I go to the bank and they're going to issue me with a note for a loan
[00:35:56] and I'm not going to deposit any coins.
[00:35:58] I'm just going to ask them for that money.
[00:36:01] You've really got to trust that bank.
[00:36:03] That's the only thing they've got if there's no asset sitting behind it.
[00:36:06] Yeah.
[00:36:06] And trust is an essential part of a monetary system.
[00:36:09] This is why I find, you know, Bitcoin is, you know, incredible price levels now.
[00:36:12] And anybody who bought in early, which I could have done, has made an absolute bomb.
[00:36:16] So good luck to you.
[00:36:17] But the whole idea of it being not to be able, not trusting.
[00:36:20] Buy now, by the way, because it's bound to go.
[00:36:22] It's bound to double again.
[00:36:23] There you go.
[00:36:24] Yeah, yeah.
[00:36:24] Okay.
[00:36:25] But the trust is an essential element of a monetary system.
[00:36:28] The Bitcoiners are even seeing this because, you know, I see them referring to Bitcoin as Bitcoin
[00:36:31] and other coins as shit coins.
[00:36:33] So they're trying, you know, they're saying you should trust us, not the others.
[00:36:36] But trust, therefore, even if you try to avoid it, trust is still an essential part of a monetary system.
[00:36:41] It's the only thing, though, isn't it?
[00:36:42] If a bank creates money, if on this island now they've been given the ability, Chancellor Reeves has said, yes, banks can issue notes.
[00:36:51] Don't worry about the coins.
[00:36:52] Then all of a sudden that changes the whole way this island works, doesn't it?
[00:36:55] Because I've got a great idea.
[00:36:58] There's a billion or a million coins in circulation.
[00:37:01] It keeps on going in circulation.
[00:37:02] I've got a great idea for my cars made out of polystyrene.
[00:37:07] Only place in the world that makes it.
[00:37:09] We're going to become the polystyrene car capital of the planet.
[00:37:12] But I need to borrow 100 million.
[00:37:15] I can go to the bank and the bank can say, sure, we'll give you 100 million as in notes, which you can now spend.
[00:37:25] Everyone accepts those notes.
[00:37:26] That extra money now circulates in the economy, boosts the economy.
[00:37:32] People have more money from which they can buy my cars once they've been made.
[00:37:37] Yeah.
[00:37:37] That seems elegantly simple.
[00:37:39] Yeah, and it is that simple.
[00:37:41] The appalling thing, if you try to model using double-entry bookkeeping, which, of course, I use my Ravel software for,
[00:37:47] if you try to model using double-entry bookkeeping how banks actually operate, it's ludicrously simple.
[00:37:53] You have two elements.
[00:37:55] You put an amount of credit dollars per year into your deposit account.
[00:37:59] It's one entry.
[00:38:00] And they put an entry of credit dollars per year into your loan account.
[00:38:03] Two entries, one line.
[00:38:04] It's all over.
[00:38:05] That's all you need to explain.
[00:38:06] There are other follow-on effects that go from that.
[00:38:08] John Carney does a very nice job of talking about an excellent broadcast from years ago called loans create a lot more than deposits.
[00:38:19] He goes for the ancillary effects that can flow from that initial act.
[00:38:22] But the initial act of bank putting credit dollars per year, let's say $100,000 in your bank account, and saying you owe us $100,000.
[00:38:29] That's what creates money.
[00:38:30] Incredibly simple.
[00:38:31] You try to put the neoclassical models into double-entry bookkeeping, and you end up with three or four tables and mythical arrangements, et cetera, et cetera.
[00:38:38] It's complicated to get their models, and they're wrong.
[00:38:41] The real world is simple, and it's right, and that's what used to be called endogenous money.
[00:38:46] I now call it bank-originated money and debt, and I love the acronym being BOMBED.
[00:38:51] We live in a BOMBED economy.
[00:38:52] It's about time we bloody well grew up and understood it.
[00:38:54] So what happens to – now that these notes can be issued, what happens to cornucopia?
[00:39:02] It's just an opportunity.
[00:39:04] I mean, all of a sudden, they can see growth.
[00:39:06] They'll see inflation.
[00:39:07] They will see inflation, of course.
[00:39:09] Chopping down trees and building monuments to Phil Dobby on the point with these lovely statues that we're placing out to the ocean.
[00:39:16] Well, last week, there's not many trees left, which is a bit of a problem.
[00:39:19] I mean, it does mean that we can decimate –
[00:39:22] Maybe they can plant some trees.
[00:39:23] Well, maybe.
[00:39:23] Yeah, there we are.
[00:39:24] So the future's looking brighter.
[00:39:27] Of course, at some point, I'm going to progressively, if that's the only – beyond polystyrene cars, no one comes up with any ideas.
[00:39:35] The economy's ultimately still stuffed, though, isn't it?
[00:39:38] Because bit by bit, I'll be paying that bank loan back, and that destroys money.
[00:39:43] Yeah, well, what you have is a whole cycle of new loans being issued and old loans being repaid.
[00:39:48] That's why when I'm in model in Ravel, I specifically rule out individual – modeling individual transactions, because individual loans do have to be paid back.
[00:39:58] Of course, a lot of corporations have – they roll over their loans over time.
[00:40:02] When a loan matures, they issue a new one, or they have a new credit note coming out.
[00:40:05] So it's quite common for business enterprises to roll over the debt that they've got.
[00:40:10] But you better often think at the aggregate level, where you might pay your debt back, but somebody else takes out a new loan.
[00:40:15] So the aggregate flow is what matters.
[00:40:18] So if the new loans issued exceed old loans repaid, then you have credit being created, credit money being created by the difference between the two.
[00:40:26] And that's what we've had going on for – you know, a varying of booms and busts, obviously, but doing on for 250 years at least.
[00:40:35] If you go back to the beginning of the American society in 1776, and you go back further with the British,
[00:40:47] banking systems have existed in a sort of quasi-capitalist environment for at least 250 years, maybe 350,
[00:40:56] depending on where you state the start of capitalism from.
[00:40:59] So it's been common to have banks creating money.
[00:41:01] It's just easier now with the purely electronic.
[00:41:04] We don't need promise you notes anymore or other devices like that.
[00:41:07] They simply create the money by doing an electronic entry into your deposit account and a matching entry into your loan account.
[00:41:13] We're a long way off that on the island of Cornucopia.
[00:41:16] Maybe we'll revisit them again.
[00:41:17] Oh, it's a very prominent place.
[00:41:19] Well, you know, I mean, they drive cars, man.
[00:41:21] Polistarian, for God's sake.
[00:41:22] And they think it's the greatest thing.
[00:41:25] They even enjoy collisions.
[00:41:26] But what about – yeah, they love it.
[00:41:28] But it's just going out and picking up – you know, there's a lot of jobs created with people going out and picking up those little beads of polystyrene.
[00:41:34] All the polystyrene, yeah.
[00:41:35] Whenever there's a car crash, they're all over the place.
[00:41:37] Blowing in the wind is awful.
[00:41:38] But look, what does it mean to the value –
[00:41:40] The answer, my friend.
[00:41:43] Borrowed this extra $100,000 or whatever it is, whatever the number is.
[00:41:46] Say 10% of the money that's in circulation.
[00:41:50] Just that.
[00:41:51] I mean, you know, a lot of people go, oh, all the extra money, that's going to create inflation.
[00:41:54] But it's not, is it, if I have grown the economy by 10% in the process?
[00:41:58] That's the key, isn't it?
[00:41:59] It's the relationship with the amount of money by the growth in the economy that we're seeing.
[00:42:03] Yeah.
[00:42:04] There are going to be differences between the two, and you may get some inflation out of a sustained period of monetary growth because there's extra demand.
[00:42:12] People put up prices because of the high level of demand because you're taking – this is Sean Payter's argument.
[00:42:18] You're taking existing resources away from existing employment, so you've got to pay them a higher price to motivate the workers to move and companies to rent to you rather than renting to the other purchaser or hirer of capital equipment.
[00:42:30] So it is something which will cause inflation for a while, but then when the goods come into the market, they cause deflation.
[00:42:36] So you get cycles of inflation and deflation coming out of the process of innovation, and that is a realistic description of what's happened in capitalism.
[00:42:44] So finally, though, if my polystyrene car manufacturing plant is the only real industry on this island and everyone else is in small business supporting people who are working in my factories, people who are picking up the polystyrene and recycling it, the people who are running the corner shops and all that sort of stuff.
[00:43:03] And I'm still owing the bank a great deal.
[00:43:06] And because they know they're in a dominant position because we all need that money, they charge 10%, maybe 20% interest on their loans.
[00:43:16] They're just bastards, basically.
[00:43:19] Then they are going to –
[00:43:20] How unlike our bankers?
[00:43:22] Yeah, exactly.
[00:43:23] Some banks are fantastic, like the ones who pay me to live.
[00:43:27] Who's poncier the vodkas, yeah.
[00:43:29] But the – I mean, they are beautiful people, all of them.
[00:43:33] But if banks are charging hefty loans just for being a bank and they are the money creators and that money is also giving them a big cut, by the very nature, won't they just become the most dominant business on the island?
[00:43:52] Oh, no.
[00:43:53] I can't think of a single island on a planet where banks have become the major force of social change.
[00:43:59] Not a single one.
[00:44:00] But, I mean, they would.
[00:44:01] They would because everyone –
[00:44:03] Yeah, they have become.
[00:44:04] They have the monopoly on – if the government is not doing it, they have the monopoly on money creation.
[00:44:08] They can charge what they want because the whole future for the growth of coinucopia is entirely dependent on those banks.
[00:44:15] So the wealthiest people will work there working out what's the maximum they can get away with.
[00:44:22] And so you'll have to borrow more because you've got to service that debt.
[00:44:26] And so they will just go and grow, surely.
[00:44:29] Oh, no.
[00:44:29] Hang on.
[00:44:29] Let's not get caught in a fallacy here.
[00:44:32] This is one of my favorite fallacies to fight on the internet because people believe that because if banks lend you $100 and they charge you 10% interest, you've got to pay them $110.
[00:44:40] They'll only give you $100.
[00:44:41] You've got to continue going back and borrowing.
[00:44:43] That is a – maybe we should need to do the next podcast in the Cointopia series because that is a stock flow era which we need to get out of people's heads.
[00:44:53] Well, let's do that.
[00:44:53] We won't do it next week but in a couple of weeks' time.
[00:44:56] Next visit Cointopia.
[00:44:56] Back to Cointopia.
[00:44:57] The banks of Cointopia.
[00:44:58] I'm enjoying Cointopia because I feel like I can – you know.
[00:45:01] I think we've simplified things to a point where, you know, we can carry the audience with us, hopefully.
[00:45:06] But look, next time, yeah, it's a bit grim.
[00:45:10] Population.
[00:45:11] You know, can we support the growing population?
[00:45:14] Crazy predictions of how much – how many people will live on the planet by the end of the century.
[00:45:17] I don't believe it myself.
[00:45:18] I'm sure you particularly don't.
[00:45:20] We'll look at that next week.
[00:45:21] I don't.
[00:45:21] Good to talk, Steve.
[00:45:22] Okay.
[00:45:22] The Debunking Economics Podcast.
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[00:46:15] It's lively.
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[00:46:19] So search the Y-Curve in your favourite podcast app or go to ycurve.com to listen.