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There have been diaries and comments recently about creating money, some of them confused. Before we deal with that confusion, we have to ask what money is.

Money is an asset which passes current.

And by "passing current" I mean 'acts like money.' Okay, a little more explanation. If something is available for acquisition, then it can be acquired for anything which passes current. If you want a pair of shoes, you don't bring some cans of tuna fish to the store and ask how many cans the clerk wants for the shoes. You bring dollars. You can get shoes or tuna fish for dollars; you can't get tuna fish for shoes; you can't get shoes for tuna fish.

(Some years ago the second "Adam Smith" wrote a book called Super Money. He pointed out that corporations could buy up other corporations with their stock. It was, however, not super money, but a remarkably inferior money. They could acquire a new subsidiary with their stock but they couldn't pay their workers or their suppliers with it. What would be your response if -- on payday -- your employer handed you some stock certificates instead of the pay you had expected?)

Now, People accept money because people accept money. Less cryptically, you will accept money for what you have to sell because the people from whom you want to buy will accept money for the goods you want. Money is entirely a social convention.

Years ago, people thought that others accepted money because they thought that it stood for a certain quantity of gold (or silver). Adam Smith (the real one) shared the prejudices of his age, but he had an extraordinary intelligence and an inquiring mind. He asked "Why will a London merchant accept a worn guinea for a full guinea's worth of goods?" A guinea was a gold coin and in passing from hand to hand, some of the gold wore off. A worn guinea contained less gold than a fresh-minted guinea did. Still, it would buy as much as a fresh-minted guinea would. Smith came up with an answer, but not a very satisfactory one. (The merchants had some idea of the amount of gold in an average circulating guinea, and were selling the goods for that much gold.)

Still, even Smith didn't ask the deeper question: "Why did the merchants sell codfish, for which they had an immediate use, for gold, for which they had no immediate use -- and often no personal use at all?" My answer is that they accepted the guinea because they could trade the guinea for what they needed. And, since the next merchant would take the worn guinea, it was worth as much to this merchant as the fresh-minted guinea would be. The Georgian merchants weren't accepting gold, any more than a modern store keeper is accepting paper because he wants paper. The Georgian merchants were accepting guineas, money.

After all, if you go to a grocery store and give him a piece of paper with $20 printed on it (in just the right fashion), he will not only let you have some groceries; he will gladly also give you several pieces of paper of just the same size with $1 printed on each one (in a remarkably similar fashion and by the same organization).

During the Great Depression, prices fell. Some people blamed the continuation of the depression on the falling prices. FDR "took the USA off the gold standard" -- he said the Treasury would no longer pay gold for dollars. It would pay silver for paper dollars, but the president gradually reduced the amount of silver it would pay for a paper dollar. He waited for the prices to rise again since the money was worth less. It didn't. (Prices rose again as the economy recovered, but inflation -- or "reflation" -- didn't march along with the lower amount of silver you could get for a dollar.) At that point, it became clear -- or clear to those with eyes to see -- that money was a social convention, not a convenient way to carry metal around in a wallet.

Some fraction -- about half, currently -- of the amount of money in circulation consists of federal-reserve notes, the green pieces of paper in your wallet. Some people think that this is "real money," while the money in checking accounts is only money in the sense that you could turn it into green paper. This belief is even stranger than the obsolete belief that money was only a substitute for metal. As far as the people handling the money supply are concerned the money is the amount in checking accounts. The paper in your wallets is a concession for consumers who take only a marginal -- although essential -- part in the flow of funds. Checking accounts are the more important part of the money supply.

(Woody Guthrie sang of banks "and the vaults are stuffed with silver that we have sweated for." Woody was a great musician, but he didn't understand banking. The coins, and the paper bills, in a bank's vaults are something that the banker tries to minimalize. It is necessary for his business, just as the guy whose business it is to rent tuxedos has to have tuxedos hanging in his shop. But the only ones which make him money are those outside the shop being worn. In the same way, the bills and coins in the bank are unproductive stock. What makes money for the banker are the checking deposits he has lent to customers.)

Okay. Money is what people will accept as money. How is more money created? Well, you go into a bank and exchange your IOU -- say a mortgage -- for the banks IOU -- a deposit in your checking account. Your IOU isn't money. (If people would accept it, you wouldn't need the bank.) The bank's IOU is money. So that is new money. (You don't do that unless you plan to spend that money. We are looking at it before you spend it, however, to avoid unnecessary complications.) Note, however, that it is not new wealth. Neither you nor the bank have a change in net worth: Your IOU  is a new asset for the bank -- the money in your account is a new liability for the bank. The money in your account is a new asset for you -- your IOU is a new liability for you.

There isn't new wealth. There is new money. What makes it money? the willingness of everyone to accept it as money.

Now, how much money does society need? Somehow, at least one person on dKos seems to think that the stock of money must be proportional to the stock of actual goods. The relation between the two is comparatively remote. The exchange of goods is -- almost always -- facilitated by the exchange of money for goods. So the flow of money must match the flow of goods, and the stock of money must be sufficient to enable sufficient flow of money to enable the flow of goods.

But the flow of goods enabled by money depends on the economic structure. If Smith Co. makes rails from steel it purchases from Jones Co. which makes the steel with iron ore it buys from Brown Mining Co., then the economy needs the dollars that Smith pays Jones and the dollars that Jones pays Brown. If US Steel makes the rails from steel it refines from ore it mines, then it clearly doesn't need those dollars. (It does need the dollars to pay its workers, but so do Smith, Jones, and Brown.) So the need of dollars for commerce is increased by the level of economic activity, but decreased by the concentration of establishments.

The need for dollars is also decreased by more efficient economic systems. We need a money flow; we only need the money stock to enable that money flow. A hell of a lot of money flows via electronic transfer these days. The same quantity of money might take part in ten transactions in a single day.

While how much money we need is a matter of constant argument, who makes the final decision is clear: The FRB, The Federal Reserve Bank. (Often called "The Federal Reserve" with "bank" omitted.) Here is how it controls the amount of money in the system:
Each bank must keep a certain small fraction of deposits that its customers make in the bank in a deposit that this bank makes in the FRB or it must borrow some other bank's deposit in the FRB. So, while the FRB has only the weakest control over how much a particular bank has in it's books as deposits, it has complete control over how much the entire banking system has on deposit. The rules are written: "Each bank must have 1/X of its deposits in the FRB." The actual control is: "The total of banking deposits is not more than (and generally pretty near to equal to) X times the amount in the FRB."

When you write me a check on Smith Bank and I deposit it in Jones Bank, then Jones Bank sends it to a "clearing house." The clearing house credits the amount of the check to Jones Bank's account at the FRB, and debits that amount to Smith Bank's account at the FRB. They then send the check to Smith Bank (along with all the other checks drawn on Smith bank that clear that night) for them to debit your account.  

If more money is in checks drawn on Smith Bank than is in checks deposited in Smith Bank, then Smith Bank must increase its deposit in the FRB -- its "reserve." Generally the bank can do this in two ways:
1) It can send the FRB a check drawn on another bank (say Brown Bank) that would -- like any other check drawn on Brown Bank -- lead to a decrease in Brown Bank's reserve, its deposit in the FRB. (If Smith Bank were to send the FRB a check drawn on itself, this would be a wash, increasing and decreasing its reserve by the same amount.)
2) it can borrow some other bank's reserve. This is done all the time, and is for one day at an interest rate which is a few percent per year. You can imagine the amounts of money in a typical loan.
Neither (1) nor (2) changes the total amount of the banking system's deposits in the FEB by one penny.

If the FRB wants to increase the total amount of money, it increases the total deposits of the banking system in the FRB. It does this by buying treasury bonds. (The FRB can also either sell treasury bonds or redeem them when they mature -- when they come due. This has the opposite effect from what I'm laying out. That transaction decreases the money supply. Obviously, over time, the FRB increases banks' deposits.) The FRB pays the dealer for those bonds with a check. The dealer deposits the check in a bank (say Green Bank). Like any other check deposited in Green bank it goes to a clearing house. The clearing house increases the deposit of Green bank in the FRB. Since the check isn't drawn on another bank (rather it is drawn on the FRB, itself), it doesn't reduce any bank's deposit in the FRB. So, that transaction isn't balanced, and it increases the total deposits in the FRB of the entire banking system. That results in the amount of possible deposits in banks by X times the price of the bonds (and the actual increase in deposits by almost as much).

(In laying this out, I've been ignoring the complication of currency and coin. Basically, a bank can reduce it's deposit in the FRB by asking for cash. This counts as the bank's reserves until it walks out the door. There is no reason to ask for cash, however, unless the bank expect it to walk out the door. Banks also can turn some currency and coin into the FRB and increase their deposits by doing so. The FRB takes advantage of that to cull the most ragged currency when that happens.)

- -

This allows us to go back to the question of why the bank's IOU is money when yours isn't. The requirements for reserves by the FRB, the insurance for small accounts (and recent laws give quite generous definitions for "small"), and bank examiners all contribute to the general feeling that "money in the bank" is safe. (As I've tried to demonstrate, damn little of the money is "in the bank.") That contributes to the trust we have of checks -- you might doubt that I actually have enough money in the checking account to cover it, but you don't doubt that the bank can cover it. This makes money in a checking account money -- that is, it will pass current -- that is, you and everyone else will accept it.

And, since money in a checking account will pass current, when a bank trades its IOU for your IOU, it creates money.

This leads to two errors of understanding.
Bankers keep chafing at the limits regulators and the FRB put on them. But they can operate only because of the social agreement that their IOUs are money. And that agreement is due, in part, to the limits put upon them.
Some self-identified populists claim that the ability to create money is some privilege conferred on banks by the FRB. What the government and the FRB contribute is limits, not a special license. It is society as a whole, and any part that you might want to do business with, which says that a bank deposit is money and that your IOU is not. The FRB doesn't prevent you from paying your bills with IOUs. (Although any huge surge in people doing so would wreck the FRB's control of the money supply.) It is the people to whom you owe those bills who want a check instead of an IOU.

-=-

Notice that all this creation of dollars is done in terms of dollars. It is all circular. What a dollar is worth at the moment is quite clear. Walk into any grocery store, and you can find out what it will buy. A dollar's "intrinsic worth" is less clear, if that concept has any meaning.

Certain gold bugs think that the "legal tender" rule is what keeps currency from collapsing in value. "You have to accept it," they say. "If it weren't for that government imposition, this stuff would be waste paper." That is drastic delusion about the law. Any two parties can make any contract for the payment for anything in Oreo cookies. If you make a contract for payment in dollars, however, and only if you make a contract in terms of dollars, then you must accept Federal-Reserve notes. (I've seen signs on building-management companies that they will only accept payment by check, not in cash. This would seem to conflict with the legal-tender principle, but their reason is clear.)

Paulistas have tried to issue gold coins, but those coins are -- if I understand it -- called "dollars" rather than "rons." If they truly thought that gold money was different from fiat money, you have to wonder why they want to name their gold money after the paper money.

I might note that not only is the notion that: "money in checking deposits is only money insofar as it represents some 'real' bills" an illusion, but money can be used when there are no bills or coins available. I mentioned the guinea gold coins of the Georgian period. They have not been minted in centuries, and they have not circulated in almost as long. Some luxuries in Britain, however, are -- or were recently -- still priced in guineas. If you agree to buy something for 20 guineas, you owe 21 pounds.

Originally posted to Frank Palmer on Mon Jan 28, 2013 at 12:55 PM PST.

Also republished by Changing the Scrip and Community Spotlight.

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Comment Preferences

  •  A few nuances (19+ / 0-)

    This is a complex subject and you've done a good job explaining it.  Congratulations.  You are now smarter than 99% of television pundits and 100% of deficit scolds (the latter is not a high barrier to get over).  That will not, however, stop me from doing a braindump of my ancient finance and economics training and my intermittent experience peddling technology to the people who run all this stuff on Wall Street.

    1. Currency (paper notes and money) is a relatively small part of the money supply (and large amounts of currency are effectively out of circulation; these are generally as $100 bills and, as you've guessed, are in the vaults of the world's drug lords, terrorists, and other proprietors of the underground economy).

    2. There are three mechanisms by which the Fed can affect the money supply.  Varying the reserve ratios (which are generally higher than a typical bank's cash management requirements) is generally the coarser of the knobs.  (The least common one is the Fed discount rate, which is mostly secondary -- it signals the Fed's intent.)  The primary mechanism is open market operations.  These are buried under the process of setting short term interest rates but as a practical matter it adjusts the money supply.

    3. There have historically been two money supply measures.  The first, M0, is (was) cash plus demand deposits.  (Demand deposits can be moved around with paper or electronic checks.)  M1 added "time deposits."  Once upon a time, checking accounts paid no interest and savings accounts couldn't be accessed with negotiable instruments such as checks.  This distinction is less relevant today but not entirely nil.  My savings account is electronically linked to my checking account but the transfers take place overnight; it takes two steps to write a check against my savings.  In terms of monetary policy, deposits in money market mutual funds, which are generally near-cash in terms of safety and accessibility, affect the money supply as well.

    4. A lot of non-monetary securities are nonetheless typically treated as "mark to market" assets.  Normally, accounting records are based on historical cost (if you bought that steel mill 30 years ago, its book value is whatever you paid for it plus whatever you've paid out since for improvements, minus depreciation).  The market value of that steel mill doesn't enter into it until you sell it.  But if you hold publicly traded stocks (if it's part of an acquisition the rules are different, I think) you carry them on your books at their market value.  Why?  It's easy to determine the value of most common stocks, and they can be turned into cash for something close to that market value.

    5. You can, in principle, use gold as money.  It has a lot of problems as money.  First, you need a proxy for it unless you want to take gold bullion on your next shopping trip; that's where money originally came from.  Second, you have physical inventory accounting.  Third, it's an industrial commodity, used for dental work, electronics, and all other manner of things besides money.  Fourth, it's an extractive commodity -- when the US had a gold backed currency in 1849 during the California gold rush, the result was massive inflation.  In other words, Ron Paul and the rest of the gold bugs are crackpots.

    6. U.S. (and British and Japanese) government debt is solid despite the deficits of those countries (Japan has a much bigger deficit than the US but the yen is strong enough that the JCB has been trying to figure out how to devalue it for years) because their securities are essentially backed by their currency.  This isn't a license to print money with abandon.  But if your economy has 70% capacity utilization, debt (and subsequent monetization of that debt, what happens when the Fed directly or indirectly buys it) isn't going to be inflationary.  (And even if one's central bank is expansionary when it shouldn't be, the result is not bankruptcy but inflation.)

    Be advised that neither of us are likely to be welcome at a meeting of the Ron Paul Black Helicopter Spotters' Club.

    •  On point 1, don't forget that many countries (2+ / 0-)
      Recommended by:
      linkage, katiec

      have a stockpile of US dollars. Such as China, which holds about $1.5 trillion.

      •  I am not sure (0+ / 0-)

        that China is holding "currency" in that amount. I think that China is holding debt instruments in that amount.

        That would be an awful lot of actual, physical paper to be stored somewhere, and would represent (in effect) an interest free loan to the United States. Come to think of it, it would represent a "negative interest" loan to the US, since that $1.5 trillion in cash will almost certainly be worth less in ten years than it is now, because of inflation.

        •  I don't know what amount is in their reserve, (0+ / 0-)

          or securities account.

          But since interest on bonds are so low, and we're now paying a low interest on reserves, they might be keeping more dollars in their reserve account.

          But I don't know how their reserve account is a  loan to the US?

          •  Think of it this way (0+ / 0-)

            I buy $1million dollars of enameled figurines from you, and write you a check. You take that check, but just hold on to it. I still have the money in my bank account drawing interest, while you have the absolute right at any time to come to my bank and draw out $1MM.

            Now, if you never cash that check, or if you only cash that check once I have bought another $1MM of really cute LOLcat figurines from you, I have a perpetual, interest free loan from you.

            This is how Warren Buffet operates with GEICO and the other insurance companies he owns. Read his annual letters for a better explanation of the concept of "float."

            •  I don't think that matches up to how national (0+ / 0-)

              accounting is done.

              China gets paid in dollars.  They keep those dollars in either a savings account or a securities account at The Fed.

              Tsy does not borrrow from China.

              It borrows from The Fed, which marks up Tsy's account.

              These are two independent actions.

              the Fed is the ONLY bank Tsy uses.

              It doesn't use a china bank and doesn't spend china's dollars, or bonds.

        •  The articles I read indicated that was their (0+ / 0-)

          approximate cash holdings- most countries (everyone except the US really), including China, are unable to pay their debts to foreign countries using their own currency, so they they instead stockpile US dollars to use since its the currency that almost all other currency is indexed against.

    •  Check out propoprtion of currency (0+ / 0-)

      I learned that currenty is a small proportion of money.

      Then I looked at current figures. It's close to 50% of M1.

      Surprised me.

  •  I liked this diary very much. (4+ / 0-)
    Recommended by:
    ModerateJosh, linkage, katiec, johanus

     I appreciate diaries that inform or educate or both and feel we need more of them.  The only flaw I found is when I give my grocer a piece of paper with $20 printed on it, he gives me back diddley squat.  Years ago I’ll admit he use to give me some paper with $1’s printed on each,  but those days are gone.  

  •  Well done (4+ / 0-)
    Recommended by:
    alain2112, linkage, semiot, cynndara

    It has occurred to me that what bankers did with credit default swaps, especially "naked" credit default swaps is create a transnational inferior money that could increase without regulation.  Until the bubble burst.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Mon Jan 28, 2013 at 06:45:53 PM PST

  •  I'm not so sure about this one: (4+ / 0-)
    Recommended by:
    linkage, gjohnsit, katiec, Justus
    Money is what people will accept as money.

    Money & markets were created by governments for taxes:  taxes had to be paid in currency, and the only way to get currency was to sell goods or services to someone who was paid in currency.  Governments paid their army in currency, so a good way to get the money to pay your taxes was to sell food to soldiers.  That's how markets are created, that's how armies are fed.  No government, no taxes, no currency.

    And, as far as the gold-bugs are concerned - gold currency is still fiat currency:  if a gold coin wasn't worth more than its weight in gold, there would be no reason to mint it into a coin and gold currency would not exist.  The only difference between a paper note and a gold coin is the cost to manufacture.  If gold was inherently valuable, the south american Indians would have conquered the Spanish because the Indians had gold and the Spaniards didn't.  But the Indians did not tax in gold coins, so gold was just a shiny metal to them and they did not understand why the Spaniards were so crazy for it.

    To any wingnut: If you pay my taxes I'll give you a job.

    by ban48 on Mon Jan 28, 2013 at 06:49:10 PM PST

    •  Comment (3+ / 0-)
      Recommended by:
      linkage, Justus, Odysseus

      It's not necessarily a "government" as we understand it that drives this.  In a modern economy, a complex version of the dynamic you describe does indeed give the currency value, and it's likely to be more stable that way because of the stabilizer effect of government spending -- this doesn't happen with local feudal lords because they typically don't control a large enough economy to support a convertible currency; the only people they can force to use their money are peasants.  However, anyone who has enough economic output (and enough of an institutional banking system that their currency isn't a joke) can make their currency be universally accepted.

      •  Feudal lords didn't pay their peasants, they (2+ / 0-)
        Recommended by:
        gjohnsit, katiec

        forced them to work the fields and withheld food if they did not.  It was little more than slavery except peasants could not be bought or sold.  They could not run off because no other feudal lord would accept them (part of the code of honor among the nobility).

        But, companies have paid workers in company script and sold goods in stores that could be paid for in that script.  We've seen it here during the great depression.  Workers accepted it because the company controlled access to food, the workers had no other place to go to get food (it was a Great Depression.....)

        So, I think a better statement is:

        Money is what people who control trade and/or can levy taxes say what money is.
        So, a mafia could move into a neighborhood, and start demanding payment from everyone of 100 LouieBucks per month.  The only way to get LouieBucks is to go to Louie and offer him goods or services and get him to pay you in LouieBucks.  Now if Louie started paying out excess currency, if I earned 200 LouieBucks in one month, I could trade them to someone who needs them, and a market is born.

        And, if the mob goes away, LouieBucks could still live on as a currency out of habit.  But, without the threat of collection fees, it would probably fade over time (as will bit-coins).

        I do agree that alot of people do not understand what money is.  But I also think it is dangerous to tinker with it as it is a cornerstone of our civilization.  If we get callous with it and allow private entities to create currency by either controlling trade and/or levying fees and forcing payment in their own currencies, then we are really then playing with fire.

        To any wingnut: If you pay my taxes I'll give you a job.

        by ban48 on Tue Jan 29, 2013 at 03:43:09 AM PST

        [ Parent ]

        •  PS - Starting a fire isn't necessarily a bad thing (2+ / 0-)
          Recommended by:
          katiec, cynndara

          :)
          I've read case studies about communities that were stuck in ruts with depressed economies, so they started minting and using their own script.  And, it worked.  They created a vibrant local economy and the standard of living rose.  They were also promptly shut down by government agents and banks because, well, money is also a means of control and the powers-that-be didn't like the competition.  I wish I could find that study again.

          Don't take this as an endorsement of the goldbugs or other idiots trying to create their own currencies, this was the exact opposite of the 'free market creating currency' fairy tale those nuts peddle. And I do not trust the intentions of various state legislatures that have tossed around the idea of their own currencies either.

          To any wingnut: If you pay my taxes I'll give you a job.

          by ban48 on Tue Jan 29, 2013 at 04:46:22 AM PST

          [ Parent ]

          •  I think it was the Isle of Guernsey or Jersey (1+ / 0-)
            Recommended by:
            katiec

            where they made fiat script to finance local infrastructure (to build the market and other public buildings) that was denominated in pounds and served (still serves?) as a supplemental currency in the local economy. My friend in California is a Medical provider. The state reimbursed him with script when they had blown their budget. The script wasn't recognized by merchants, but his bank accepted them for deposit.

            I prefer the government as sole issuer. If they would only issue enough of the stuff, and spend it wisely, we'd be out of this economic mess and prospering.

        •  Quibble: "Scrip" not "Script" (2+ / 0-)
          Recommended by:
          hubcap, Odysseus

          The term for a substitute for currency which is not legal tender is "scrip" (not "script).

    •  Spot on (3+ / 0-)
      Recommended by:
      ban48, katiec, Justus
      Money & markets were created by governments for taxes
       I just got done reading Debt: The first 5,000 years. Graeber goes into extensive detail about how "free markets" are actually a government creation. Not something that sprung up naturally (like all economists from Adam Smith on assumed).

      ¡Cállate o despertarás la izquierda! - protest sign in Spain

      by gjohnsit on Tue Jan 29, 2013 at 05:30:53 AM PST

      [ Parent ]

      •  yup. It is funny how his message is so simple (1+ / 0-)
        Recommended by:
        katiec

        but so radical, since it flies in the face of what we tell ourselves.

        To any wingnut: If you pay my taxes I'll give you a job.

        by ban48 on Tue Jan 29, 2013 at 06:06:42 AM PST

        [ Parent ]

      •  I've been reading it as well (0+ / 0-)

        and it is AWESOME.  That said, I would be cautious about assuming that his explanation of the origin of money is The Truth.  Or at least, about claiming that in public on no more backing than the word of a superb intellectual who is flying in the face of 200 years of economics tradition.  It might take a while for his concepts to sink into general acceptance.  For now, we're going to have to treat them as hypotheses.

    •  Um, history? (0+ / 0-)

      I can list a few places, genreally in colonies, where taxes were institurted to make people work for money.

      But, on the other hand, there was money in situations where therre were no taxes.

      And, of course, there have been taxes in kind before the CSA tried to fund a war on them.

      So, aside from someone else who asserts that, where do you have a source on money being created to facilitate taxes?

  •  Bitcoin is making a comeback (5+ / 0-)
    Recommended by:
    linkage, Bob Duck, katiec, Odysseus, lotlizard

    Bitcoin is digital cash. It is anonymous, borderless, instant, secure, fixed-issue-rate, cash that can be exchanged over the Internet at the speed of light, without borders, governments, Paypal censors telling you who you can or cannot give money to

    So in a world where you can donate via PayPal and VISA to the Ku Klux Klan, but you cannot donate to Wikileaks, money is also political if it can be filtered and controlled

    Have a look at bitcoin, as much as it has been maligned it is not going away so easily.

    Oh, and if you liked this, I accept bitcoin tips:

    19mM4YDGqtZwB23y68MAExbJhrfY1goGu7

    •  Only cash money allows the freedom of anonymity. (2+ / 0-)
      Recommended by:
      DRo, cynndara

      So long as cash is accepted we can be anonymous.  Pay electronically and all movements can be tracked and worse... stopped.
      Banks are increasing their advertising about the advantages (to them) of eliminating cash.
      I'm in no way a CT,  but just being practical.

      •  Bitcoins are easier to launder. (2+ / 0-)
        Recommended by:
        katiec, Odysseus

        There are services that'll take your bitcoins with instructions to provide them to "Bob".  They have a whole pile of bitcoins they have from similar transactions.  They take a fee to essentially throw those bitcoins into the giant pile, mix them up and send them on to "Bob".  From an external perspective it's clear they both took from you and gave to Bob.  But it's less clear that the exchange is from you to Bob.  Also Bob is a fake person in possession of a temporary (read 1 hour) online wallet which then transfers possession to another temporary wallet with a fake identity which then...you see where this is going?  All managed through an anonymising process like Tor.  So sure it's obvious you're doing all this if someone's reading everything coming in and out of your computer, but it's not obvious to someone tracking the temporary wallet websites and laundering services.  

        Wired did a piece on The Silk Road a few years ago.  Begs the question "How the hell do drug dealers sell to people over the internet and not get caught?!?!"  This is how.  

  •  Frank, can you elucidate on this question? (2+ / 0-)
    Recommended by:
    semiot, Justus

    Is there a difference between the "money" I control, which can be counted in a few tens of thousands of dollars, and the money Bill Gates controls?

    In terms of the consumer goods and services I can consume, the amount of money I possess is finite. In the same terms, Bill Gates cannot, in practical terms, exchange his "money" for stuff that he can actually consume.

    I'm not sure this question is well formed, but I hope you can see what I am getting at.

    Note to Boehner and McConnell: "You don't need a weatherman to know which way the wind blows." --Bob Dylan-- (-7.25, -6.21)

    by Tim DeLaney on Mon Jan 28, 2013 at 08:40:06 PM PST

    •  My two cents: (2+ / 0-)
      Recommended by:
      cynndara, lotlizard

      Money for Bill Gates is not money, it's power. You use your money mostly to exchange for things you need or want, or to hold a modest reserve for future exchanges. Bill Gates uses his money power to move masses and associated assets in directions he wants to see movement in. At some point a change in money quantity results is a change in money quality. Bill's money is better than yours, because of the concentration of wealth power it represents.

      Courage is contagious. - Daniel Ellsberg

      by semiot on Tue Jan 29, 2013 at 09:30:29 AM PST

      [ Parent ]

      •  Well, that's sort of what I was getting at, but (1+ / 0-)
        Recommended by:
        semiot

        there is another question: Does money that is not spent just disappear? Isn't the wealth of the very wealthy equivalent to burying 100 dollar bills in your back yard?

        Note to Boehner and McConnell: "You don't need a weatherman to know which way the wind blows." --Bob Dylan-- (-7.25, -6.21)

        by Tim DeLaney on Tue Jan 29, 2013 at 09:51:51 AM PST

        [ Parent ]

        •  It depends (2+ / 0-)
          Recommended by:
          cynndara, Tim DeLaney

          What is Wealthy Person doing with their money?  If WP has a billion dollars and simply puts it in the bank and spends it at the inhuman rate of 10 million dollars per year, it would take 100 years to spend it all and it would be like the majority of the money was buried.  However, most of the very wealthy don't do that.  If they buy bonds, presumably the state, country or company who sold them the bonds is going to do something with the money (new issue), or needed money to build something in the past (existing issue).  They might buy stock in new or existing companies.  A new company might want to trade equity for the cash they need to expand.  Johnson & Johnson went public a long time ago and doesn't benefit directly if someone buys a million of their shares on the open market, but someone(s) somewhere decided to sell those shares that day intending to do something with the money.  They might also spend 100 million on art to hang on their wall or buy and drink $5,000 bottles of wine.  That's money wasted as far as I'm concerned, but WP bought those things from someone who now has that money to spend however they like.

          My problem is not with wealth per se, it's the idea that the wealthy are somehow special, smarter or better and therefore deserving of a lower tax rate.  If a person makes more money than they can spend, how does giving them more money help the economy.  Especially if you're getting that money from people who spend virtually all their income.  If person A spends all his income and person B saves 30% of his income, taking anything from person A and giving it to person B actually reduces economic activity.

    •  Well, bill Gates controls less MONEY than (0+ / 0-)

      Well, bill Gates controls less MONEY than people say. Bill Gates has property -- mostly stock in Microsoft, but more of dollars worht of other kinds of property than you do.

      We compare property by way of dollars. Else, it would be non-comparable. But we shouldn't count the property as dollars.

      There is certainly some ladder of stages:
      1) You can purchase what you need to live on NOW
      2) You can purchase as much as you want to consume now.
      3) You can purchase as much as you could possibly consume in the rest of your life.
      4) You have enough to purchase what your descendants might like to have for the foreseeable future.
      5) You have real powwer in property.

  •  Thank You ... (0+ / 0-)

    Re-posted to Changing the Scrip.

    JON

    "Upward, not Northward" - Flatland, by EA Abbott

    by linkage on Mon Jan 28, 2013 at 10:51:55 PM PST

  •  Velocity (7+ / 0-)

    You touched on but didn't fully explain the concept of velocity.

    A reason that the huge influx of "new" money from the Fed during the recent financial crisis has not created inflation is because there was a nearly one-for-one decrease in the rate at which banks were lending and folks were spending.

    We as citizens and the people we elect to represent us must become comfortable with the reality that money is an abstraction, and that the real wealth of a society lies in the goods, services, resources, and knowledge we have and are capable of producing.

    Unfortunately, too many believe that money and particularly the trading of money in the financial markets is a path to wealth.  It makes me cringe to hear these idiots use the words "financial industry" as they worry about inflation and deficits, when we have so much unused capacity in the real economy.

    Labor was the first price paid for all things. It was not by money, but by labour, that all wealth of the world was originally purchased. - Adam Smith

    by boatwright on Tue Jan 29, 2013 at 03:10:18 AM PST

    •  It's the path to PersonalWealth IfU AlreadyHave$$$ (0+ / 0-)

      n/t

    •  Excess reserves (0+ / 0-)

      The vast majority of "new" money "printed" by the Fed since the 2008 crisis sits on bank balance sheets at the Federal Reserve.  So you're right - businesses and households are deleveraging and the banks aren't lending, so all that "new" money is just sitting there.  Velocity = 0.

      Another way of looking at it: If you perfectly counterfeited and SPENT a trillion dollars, that would be inflationary - there would be a lot of "extra" money out there chasing an unchanged amount of goods and services.  But if you buried that money in your yard, it's not inflationary at all.  The fact that a couple trillion extra dollars has come into existence is not a problem because the huge majority of it just sits at the Fed, about as inflationary as if it were buried in the ground.

      When the economy picks up and those reserves start being turned into loans and the money starts circulating, the Fed could start tapping the brakes by trading reserves for bonds, raising the Fed Funds rate and perhaps even (not sure) raising the reserve requirement.  We're not going to jump from our current low level of loan activity to 10 trillion extra dollars circulating overnight, so there is plenty of time and plenty of ways for the Fed to act to keep inflation from spiking without killing the recovery.

  •  Clear as mud. Just kidding. I have a couple of (3+ / 0-)
    Recommended by:
    semiot, Justus, lotlizard

    questions for you.

    If the FRB wants to increase the total amount of money, it increases the total deposits of the banking system in the FRB. It does this by buying treasury bonds.
    Since the US Treasury issues the bonds that the FRB buys, would you say that the Treasury plays a role in creating money?

    With all the talk about deficits, wouldn't a balanced budget eliminate Treasury's need to issue bonds, and prevent the FRB from increasing the money supply in the way you described?

    With the debt ceiling still hanging over our heads, what effect would a default have on the FRB and the banking system, considering the Treasuries that the FRB holds?

    "Democracy is a life; and involves continual struggle." ---'Fighting Bob' LaFollette

    by leftreborn on Tue Jan 29, 2013 at 05:10:36 AM PST

    •  The Fed doesn't buy from the Treasury (0+ / 0-)

      The Fed is usually buying and selling Treasuries in the secondary market, meaning that they're not buying directly from the Treasury Department. They are dealing with what's already out there, so if the Treasury stopped issuing new debt, this process wouldn't be immediately affected.  Over time, the Fed's holdings would mature and they wouldn't get their money unless the Treasury is given new borrowing authority.

      A balanced budget would not eliminate the need for government borrowing because the government's income and outgo do not match up from month to month.  A lot of companies and people pay taxes quarterly and a huge amount of money arrives in April, but the armed forces need checks every two weeks and Social Security checks go out once a month and defense contractors get paid based on separately negotiated contracts.  So there is always a need for short term borrowing to meet short term needs.  And any government, balanced budget or not, would use long term borrowing to meet long term funding needs (like building a national highway system).

      One final note, it's not necessary for the budget to be truly balanced as long as the economy is growing as fast as the overall debt.  If the economy is growing at 3%, taxes are 18% of GDP and spending is 21% of GDP, that's a stable situation.  If real growth is 3%, inflation is 2% and taxes vs. spending are 18/21, that's an improving situation - total debt as a percentage of total GDP is actually going down year after year.  That's what happened under Clinton.  We only had a couple years of surplus that only added to a couple hundred billion, but net debt as a percentage of GDP dropped from almost 60% to under 40%

  •  What is money? (3+ / 0-)
    Recommended by:
    semiot, Justus, lotlizard

    While I agree that gold does not equal money, I would like to say that gold is one of the things that constitute money.
       My reasoning is thus: anything a central bank holds in its vault should be considered money, because their reserves are what back the confidence in today's money.
      And central banks are buying gold. A lot of it.

     What's more, when push comes to shove, people will sell goods for gold.

      I would also like to offer the case that many people would like to buy and sell goods for gold and silver, but don't because there isn't a lot of it out there, and there is Gresham's Law about bad money pushing out good money.

    ¡Cállate o despertarás la izquierda! - protest sign in Spain

    by gjohnsit on Tue Jan 29, 2013 at 05:40:12 AM PST

    •  Gold isn't currently money in Chicago. (0+ / 0-)

      People will pay money for gold, and for a lot of other things.

      You can't bring gold into the grocery store to buy things. They want dollars.

      Sure, sacks of gold are hauled from one vault in fort Knox to another to deal with international finance. But that's because Gold used to be money.

      As recently as the California Gold Rush, people were buying drinks with gold dust.

  •  I wish more people would realize this about money: (2+ / 0-)
    Recommended by:
    hubcap, Odysseus
    Money is entirely a social convention.
    This dairy might help people think about money in a more useful way.

    When thinking about the economy, we should be thinking about production of goods and services.  Money is just a means to the end of keeping the economy going.  We can't run an economy larger than a hunter-gatherer village on barter, so we need money in some form.  But money should be a tool, not an end in itself.

    Our economy is becoming more financialized.  
    By that I mean that it is dominated by manipulation of money itself, rather than producing goods and services.  It is easier to make a lot of money by skimming off the flow of money from the real economy.  This is very bad for society.  That is why electing Mitt Romney, a symbol of such an economy, would have been so grotesque.

    Gold is far too useful for electronics to waste as money.

    "The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." Bertrand Russell

    by Thutmose V on Tue Jan 29, 2013 at 11:08:03 AM PST

  •  Money has value because we believe it has value (1+ / 0-)
    Recommended by:
    Odysseus

    Money is like the mime's invisible box. As long as everybody buys into the fiction that the mime can't get out, that the box is solid and confines him, we're all safe from mimes.

    Prices go up because merchants believe the value of the currency is going down. The merchant believes this because other merchants are charging him more for the things that he sells. He has little choice but to go along with the group think and raise his prices as well. The worker demands more because he believes his salary will buy less.

    It's all based on a shared belief in the value of money -- which in fact is just pieces of paper containing a promise from the government that this piece of paper has value.

    This is why the Trillion Dollar Coin was a bad idea. It might have worked (if the GOP hadn't done a temporary cave), but it points out all too clearly the imaginary property of money. If the common perception is changed and a significant number of people come to believe that money is not real and has no value, then our entire economic system implodes.

    If people stop believing that money (and that's not just paper money, it's the entire concept, including the imaginary money we have deposited in banks) is real and valuable, the next thing you know, you'll wake up at 3 a.m. and there will be a mime standing over your bed.

    Wealth doesn't trickle down -- it rises up.

    by elsaf on Tue Jan 29, 2013 at 11:51:49 AM PST

    •  Plenty of people worry about this. (0+ / 0-)

      What would happen if people realized that money is a social convention?

      Well, it is a necessary social convention. Nobody is going to stop accepting money because it is merely a social convention. You accept money because you want things for which people will accept money.

      •  Total collapse is unlikely (0+ / 0-)

        However, when confidence in the currency drops, inflation rises. We've managed to get through multiple rounds of "quantitative easing" and such without significant inflation -- mostly because demand is artificially low (caused by the Great Recession).

        But a major blow to people's confidence in the currency could easily cause sudden inflation. Seeing $1 trillion created by presidential fiat could do that.

        We've never seen hyperinflation in this country. Hyperinflation is caused by a crisis of confidence. If we ever did have an episode of Weimar Republic-style inflation, it could destabilize everything.

        Let me be clear. Technically, there is no particular problem with the U.S. government creating money at will because that's how money comes to be.

        But combined with our very divided politics, the existence of "rabble rousers" like Rush Limbaugh and Glen Beck, and their ilk, and overall discomfort people in general are feeling about the stability of the economy, whether those feelings are underpinned by facts or not, a huge creation of money by fiat could cause significant loss of confidence.

        I'll point out that the Weimar crisis was triggered by massive government borrowing to pay for World War I without raising taxes.

        Wealth doesn't trickle down -- it rises up.

        by elsaf on Wed Jan 30, 2013 at 03:39:39 PM PST

        [ Parent ]

  •  My employer does pay me in stock. (0+ / 0-)
    What would be your response if -- on payday -- your employer handed you some stock certificates instead of the pay you had expected?
    My employer has an Employee Stock Purchase Plan, which I have signed up for putting 10% of my salary into.

    It is also quite common for startups to formally pay in stock grants.  See any story about Facebook's IPO for how that worked out.

    -7.75 -4.67

    "Freedom's just another word for nothing left to lose."

    There are no Christians in foxholes.

    by Odysseus on Tue Jan 29, 2013 at 05:10:20 PM PST

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