hey Brett and any of your Berliner readers, this isn't a direct comment exactly, but to let people know that the 3rd European Modern Monetary Theory Conference 2023 in Berlin starts 2mrw. ( Sep 9-11 ) I'm still learning about MMT-ers, but have heard from friends that some of these speakers are very good at explaining the money systems ( but not necessarily good in the politics of building the alternatives ), and would be very curious how you would analyze their conference with the theme: Navigating the Polycrisis: A conference on European Macroeconomics. We might try and write up a small XLterrestrials analysis ( https://xlterrestrials.substack.com/ ), but we won't be able to attend all of it... maybe see you there !
I wish I'd seen this earlier! I know quite a few of the people talking there. The main comment I'd make is that MMT thought struggles to catch on in the Eurozone because Eurozone countries don't really control their own money (unlike most nation states), so are far more constrained in their options
This piece really helps to fill out & cement my existing understanding of payments & the money layers. I appreciate your flair for explanation & use of metaphors—thanks for sharing your knowledge!
I have a semi-related question: How do bank interest profits manifest?—as additional reserves? or does the bank maintain internal "cash accounts" where it stashes its profits?
Hi Randy, I'm really glad you find the piece useful.
In terms of your question: There’s an intuitive answer, and a technical answer, and I specialise in the former rather than the latter.
First, a metaphor: Intuitively, we can make a distinction in our own lives of gains that come as a result of 'getting something in' (e.g. I was given a bottle of whisky) versus those that are made by being released from some obligation that would have entailed giving something out (e.g. I was under obligation to provide a bottle of whisky to someone else, but was then released from that obligation, freeing up the whisky for myself). We normally represent the former as a positive flow, but sometimes we can metaphorically represent the latter like that too (in both cases it seems that I 'gained' a whisky).
Many people think of bank interest income as if it were like the former, but the most important thing to bear in mind with interest income is that the realisation of profit doesn't take the form of 'new money coming in' to some account owned by the bank, but rather 'existing liabilities being destroyed', which - in accounting terms - will manifest as an increase in the bank's equity. Put differently, to get to a point to be able to pay back a loan, you must have previously had a bunch of normal interbank payments come in, which would have led to interbank transfers of reserves to your bank, and a simultaneous issuance of chips to you, after which you hand back the chips, leaving the bank with the reserves.
That said, how this appears in the bank's internal accounting is something that would need further investigation. Bear in mind is that modern 'universal' banks have multiple business lines that go beyond traditional banking (including insurance, property investments, derivatives, securities trading divisions, and so on), so the internal accounting is very complex, and you'd probably need to speak to a bank accountant or finance director to get a precise answer to your question (and I'm not one of those). Most banks treat each division as a separate profit centre, and then even separate desks within those divisions as separate profit centres, but there will be some centralised treasury that is co-ordinating stuff, and making sense of the different movements.
What we do know, is that banks do represent 'interest income' on their cash flow statements as if it were like them receiving money from some external source (in a similar way to how a government might represent 'tax income' as if money were something that they didn't issue but had collected somewhere), but this should probably be seen as a metaphorical form of ‘inverse’ accounting (a bit like the whisky description above, where the removal of an obligation can be metaphorically represented as a positive flow. At some point I might delve deeper into the mysteries of the 'inverse accounting' (not sure if this is the right term) that money issuers use when representing the return of their own money as a form of income that they stash in an account somewhere. That topic, however, may be too technical for the average reader so I may limit it to the premium version of this newsletter. Anyway, I hope this helps a little!
Brett, thanks for the generous and thought-provoking answer! I'll be rereading and thinking about it. Once again you've helped me see the big picture more clearly, even if some mundane bookkeeping details remain a bit elusive. (I asked a loan officer acquaintance about how banks' profits are recorded; he had no idea!) (He also assured me that banks loan out customer savings...so...)
Alas I can't afford a paid subscription, but as you suggest, some topics will be over my head anyway.
More cracking work Brett. I love the visualisations they are very helpful.
BTW I loved Cloudmoney. You make this complex domain fascinating to unpick.
I have started paying with cash again as a personal statement. My local kebab shop (I have them on speed dial) are asking for cash payments to avoid the processing fees and I’m happy to oblige.
Currently reading Doughnut Economics which talks about complimentary currencies and references the work of Bernard Lietaer and the creation of Torekes. Are you familiar with this scheme? I’m interested in your views on how scalable currency schemes like this are.
Thanks for the support Howard! (and glad you enjoyed Cloudmoney too). Great to hear you're flying the cash flag
I'm a big fan of both Doughnut Economics and the work of Bernard Lietaer (I had the privilege of meeting him once). I haven't specifically looked deeply into the case of Torekes, but I briefly looked at the website and they seem to be a local civic reward system. I'm imagining they will either issued out in 'badge' form - like a gold star handed out for good work - or, if they have a sponsor behind them, in voucher form (in this case they'd be more like a monetary payment, but in vouchers that can only be redeemed in particular local stores). It would be interesting to investigate the system more deeply, so perhaps I'll put it on my Unboxing list https://brettscott.substack.com/p/asomoco-reborn. In the Unboxing series I do deep dives into alternative currencies, but it's for paid subscribers only though!
Just one more comment to say thanks Brett. Each piece of yours I read reinforces the others and helps my understanding of the realities of money grow a little more embedded in my everyday. I also share them often, including in my teaching!
Thanks so much for the support Shaun. I'd like this newsletter to build into a network of pieces that build upon each other over time, so I'm glad to hear that you're finding it useful
I like the exercise, to take the descriptions and then work through what is going on on the different layers and balance sheets in each of the operations by oneself. In case i ever teach students again on that topic... I will ask you if i can use these scenarios 😁
Btw i just love your real world examples 🤣 don't know if i wanna call them satirical... But i just love them. Especially the hedgehog builder giving money to the church "for the homeless"(and not quite reaching them). Anyways...
What i found a little misleading was the first one, for two things:
1. Is the government actually directly initiating the issuance of central bank money, when it is spending?
2. You frame neutral issuance as rendering other money inactive. By that you mean the central bank money (reserves), right? That suggests for me that the bank can't use them anymore, which is not the case. Not that i would dive into reseve requirements in this piece, but these two things felt like suggesting something wrong, to me
Hi Marvin, finally getting around to responding to this! Really glad you like the scenarios, and you're always always welcome to use them in teaching. In terms of your two suggestions/comments
1) I've simplified and stylised the piece to make the central bank equate to a government, but obviously there's a more complex relationship between states and central banks. State spending will entail a government *treasury* instructing the central bank to make payments on its behalf. Conversely, when I pay taxes in the UK, for example, the account I transfer to is the treasury's account at the central bank (or one of it's sub-accounts), which will manifest as my bank transferring reserves to the government's account, which is equivalent to destroying the money
2) This is something I think about sometimes, and I'm not sure how the official monetary policy geeks characterise this, but the easiest way to think about it is to return to the casino metaphor: when I go to a casino, I let go off control of, say, £100 in cash, and get issued £100 in chips, which technically looks like there's been a 'doubling' of the money. But while the casino is definitely an issuer of money, it's questionable whether it *adds* to the money supply, because it also *retires* money from circulation in the process of issuance. In reality, only the chips truly circulate, and the cash held by the casino is under a kind of 'lock' or shadow, in the sense that if they did try to use it they would be lapsing into fractional reserve territory, which is something they're not actually allowed to do. In a sense, reserves are held on ice, so there's a kind of 'neutral' issuance of chips. If the casino decided to cease that process, and use some reserves for their own purposes, they'd essentially be 'unlocking' those and that would push them into a true active money creation situation.
Banks are unique in being able to fluctuate in and out of this situation - in a simple deposit taking scenario, they could be thought of as a 'full reserve' casino, in the sense that the act of Layer 2 money issuance is matched by a Layer 1 money retirement, but they have the additional power of being able to create mismatches between their Layer 2 chips and Layer 1 reserves, either through credit creation - issuing new chips while keeping reserves constant - or through reducing their reserves whilst keeping chips constant. To me, it's only in these situations where the two deviate that there's an active money creation process. So, I'm not saying the bank *cannot' use their reserves, but I am saying that the creative money issuance only occurs when the deviations happen
Very useful and helpful. Thank you for laying it out descriptively and with your simple, yet clever illustrations. 😊
I'm super curious about the ways in which our living systems integrate with the monetary system. I have not read all your articles yet, so I'm not sure if or how extensively you've covered this angle.
I've written about it a little (for a beginner audience) and explored and read about it a lot.
I'd be intrigued to hear your thoughts on some of this. I know this is a rapidly evolving topic (money and currency in general).
Thanks for writing about it simply and coherently. It's important!
I'm really glad you like it Liz. I often view the modern monetary system as being like a (disassociated) nervous system embedded into an underlying economy made up of people and ecological systems (this is actually one reason for the title 'Altered States of Monetary Consciousness' - thinking about how to restore more feeling and connection into this 'nervous system'), but I don't have a specific piece that focuses on that here right now (although my book Cloudmoney has quite a lot on that). I'll definitely write more on it in future, but for now you might find Money Through the Eyes of Mowgli of interest https://brettscott.substack.com/p/money-through-mowglis-eyes, because it touches on that topic tangentially
I really appreciate the chance to see your writings, Brett. I share with other commenters the opinions about your clear, didactic and kind way of explain this always hidden subject.
I share with Liz the concern about the relationship between the systems -- physiological-psychic (cultural in wide sense) -- economic (in strict sense)-political [social] -- that support human groups in connection with the environment and among them, the conformation of the economic systems of social organization, etc. These dissimilar systems communicate through special languages: just as in biology chemical signals result in nerve impulses and movements, money is a transducer between biological-microsocial systems, urban conglomerates and the substantive economy. There is an important theme.
Another issue is the possibility of playing dynamically your ideas with models. I think in people interested in modeling could help using the knowledge from your "altered states…"
Hi Oscar, thanks for the comments and support! Yes I'm really interested in going deeper into nervous system metaphors, and appreciate your additions here. I'd love to work with modelers. More to come!
I respect Bernard's work, but probably not enough space in this comments section to go into it right now! There are echoes of his style of thought in my piece Zero is the Future of Money, but maybe I'll try do a deep dive into that particular book at some point (I'm thinking of launching a series for my paying subscribers where I do deep readings of big money books)
I got to work with Bernand a little. Absooutley fascinating.
The atchitecture of currency design keeps me thoroughly intrigued.
But it always comes back to the question of intrinsic value for me. And for that, I find that I regularly return to the ideas of living capital, social capital etc.
I'll be writing about some of these ideas as I get to them. I don't think they have enough attention yet within my circles.
Sometimes it is simply about bringing the ideas of one system into the consciousness of an overlapping system. I like your analogy to the nervous system.
Brett, there is just one thing with the whole post that keeps puzzling me a bit. Regarding the statement "....or through reducing their reserves whilst keeping chips constant" I wonder what such a scenario would entail. How can the bank reduce their 'cash' reserves while keeping their liabilities constant? Does that mean using reserves to purchase some kind of an asset, like a building? Could you provide an example?
hey Brett and any of your Berliner readers, this isn't a direct comment exactly, but to let people know that the 3rd European Modern Monetary Theory Conference 2023 in Berlin starts 2mrw. ( Sep 9-11 ) I'm still learning about MMT-ers, but have heard from friends that some of these speakers are very good at explaining the money systems ( but not necessarily good in the politics of building the alternatives ), and would be very curious how you would analyze their conference with the theme: Navigating the Polycrisis: A conference on European Macroeconomics. We might try and write up a small XLterrestrials analysis ( https://xlterrestrials.substack.com/ ), but we won't be able to attend all of it... maybe see you there !
I wish I'd seen this earlier! I know quite a few of the people talking there. The main comment I'd make is that MMT thought struggles to catch on in the Eurozone because Eurozone countries don't really control their own money (unlike most nation states), so are far more constrained in their options
This piece really helps to fill out & cement my existing understanding of payments & the money layers. I appreciate your flair for explanation & use of metaphors—thanks for sharing your knowledge!
I have a semi-related question: How do bank interest profits manifest?—as additional reserves? or does the bank maintain internal "cash accounts" where it stashes its profits?
Hi Randy, I'm really glad you find the piece useful.
In terms of your question: There’s an intuitive answer, and a technical answer, and I specialise in the former rather than the latter.
First, a metaphor: Intuitively, we can make a distinction in our own lives of gains that come as a result of 'getting something in' (e.g. I was given a bottle of whisky) versus those that are made by being released from some obligation that would have entailed giving something out (e.g. I was under obligation to provide a bottle of whisky to someone else, but was then released from that obligation, freeing up the whisky for myself). We normally represent the former as a positive flow, but sometimes we can metaphorically represent the latter like that too (in both cases it seems that I 'gained' a whisky).
Many people think of bank interest income as if it were like the former, but the most important thing to bear in mind with interest income is that the realisation of profit doesn't take the form of 'new money coming in' to some account owned by the bank, but rather 'existing liabilities being destroyed', which - in accounting terms - will manifest as an increase in the bank's equity. Put differently, to get to a point to be able to pay back a loan, you must have previously had a bunch of normal interbank payments come in, which would have led to interbank transfers of reserves to your bank, and a simultaneous issuance of chips to you, after which you hand back the chips, leaving the bank with the reserves.
That said, how this appears in the bank's internal accounting is something that would need further investigation. Bear in mind is that modern 'universal' banks have multiple business lines that go beyond traditional banking (including insurance, property investments, derivatives, securities trading divisions, and so on), so the internal accounting is very complex, and you'd probably need to speak to a bank accountant or finance director to get a precise answer to your question (and I'm not one of those). Most banks treat each division as a separate profit centre, and then even separate desks within those divisions as separate profit centres, but there will be some centralised treasury that is co-ordinating stuff, and making sense of the different movements.
What we do know, is that banks do represent 'interest income' on their cash flow statements as if it were like them receiving money from some external source (in a similar way to how a government might represent 'tax income' as if money were something that they didn't issue but had collected somewhere), but this should probably be seen as a metaphorical form of ‘inverse’ accounting (a bit like the whisky description above, where the removal of an obligation can be metaphorically represented as a positive flow. At some point I might delve deeper into the mysteries of the 'inverse accounting' (not sure if this is the right term) that money issuers use when representing the return of their own money as a form of income that they stash in an account somewhere. That topic, however, may be too technical for the average reader so I may limit it to the premium version of this newsletter. Anyway, I hope this helps a little!
Brett, thanks for the generous and thought-provoking answer! I'll be rereading and thinking about it. Once again you've helped me see the big picture more clearly, even if some mundane bookkeeping details remain a bit elusive. (I asked a loan officer acquaintance about how banks' profits are recorded; he had no idea!) (He also assured me that banks loan out customer savings...so...)
Alas I can't afford a paid subscription, but as you suggest, some topics will be over my head anyway.
Fantastic work, keep it up Brett
Thanks Mark!
More cracking work Brett. I love the visualisations they are very helpful.
BTW I loved Cloudmoney. You make this complex domain fascinating to unpick.
I have started paying with cash again as a personal statement. My local kebab shop (I have them on speed dial) are asking for cash payments to avoid the processing fees and I’m happy to oblige.
Currently reading Doughnut Economics which talks about complimentary currencies and references the work of Bernard Lietaer and the creation of Torekes. Are you familiar with this scheme? I’m interested in your views on how scalable currency schemes like this are.
Thanks for the support Howard! (and glad you enjoyed Cloudmoney too). Great to hear you're flying the cash flag
I'm a big fan of both Doughnut Economics and the work of Bernard Lietaer (I had the privilege of meeting him once). I haven't specifically looked deeply into the case of Torekes, but I briefly looked at the website and they seem to be a local civic reward system. I'm imagining they will either issued out in 'badge' form - like a gold star handed out for good work - or, if they have a sponsor behind them, in voucher form (in this case they'd be more like a monetary payment, but in vouchers that can only be redeemed in particular local stores). It would be interesting to investigate the system more deeply, so perhaps I'll put it on my Unboxing list https://brettscott.substack.com/p/asomoco-reborn. In the Unboxing series I do deep dives into alternative currencies, but it's for paid subscribers only though!
Just one more comment to say thanks Brett. Each piece of yours I read reinforces the others and helps my understanding of the realities of money grow a little more embedded in my everyday. I also share them often, including in my teaching!
Thanks so much for the support Shaun. I'd like this newsletter to build into a network of pieces that build upon each other over time, so I'm glad to hear that you're finding it useful
Great (unpaid) job!
I like the exercise, to take the descriptions and then work through what is going on on the different layers and balance sheets in each of the operations by oneself. In case i ever teach students again on that topic... I will ask you if i can use these scenarios 😁
Btw i just love your real world examples 🤣 don't know if i wanna call them satirical... But i just love them. Especially the hedgehog builder giving money to the church "for the homeless"(and not quite reaching them). Anyways...
What i found a little misleading was the first one, for two things:
1. Is the government actually directly initiating the issuance of central bank money, when it is spending?
2. You frame neutral issuance as rendering other money inactive. By that you mean the central bank money (reserves), right? That suggests for me that the bank can't use them anymore, which is not the case. Not that i would dive into reseve requirements in this piece, but these two things felt like suggesting something wrong, to me
Hi Marvin, finally getting around to responding to this! Really glad you like the scenarios, and you're always always welcome to use them in teaching. In terms of your two suggestions/comments
1) I've simplified and stylised the piece to make the central bank equate to a government, but obviously there's a more complex relationship between states and central banks. State spending will entail a government *treasury* instructing the central bank to make payments on its behalf. Conversely, when I pay taxes in the UK, for example, the account I transfer to is the treasury's account at the central bank (or one of it's sub-accounts), which will manifest as my bank transferring reserves to the government's account, which is equivalent to destroying the money
2) This is something I think about sometimes, and I'm not sure how the official monetary policy geeks characterise this, but the easiest way to think about it is to return to the casino metaphor: when I go to a casino, I let go off control of, say, £100 in cash, and get issued £100 in chips, which technically looks like there's been a 'doubling' of the money. But while the casino is definitely an issuer of money, it's questionable whether it *adds* to the money supply, because it also *retires* money from circulation in the process of issuance. In reality, only the chips truly circulate, and the cash held by the casino is under a kind of 'lock' or shadow, in the sense that if they did try to use it they would be lapsing into fractional reserve territory, which is something they're not actually allowed to do. In a sense, reserves are held on ice, so there's a kind of 'neutral' issuance of chips. If the casino decided to cease that process, and use some reserves for their own purposes, they'd essentially be 'unlocking' those and that would push them into a true active money creation situation.
Banks are unique in being able to fluctuate in and out of this situation - in a simple deposit taking scenario, they could be thought of as a 'full reserve' casino, in the sense that the act of Layer 2 money issuance is matched by a Layer 1 money retirement, but they have the additional power of being able to create mismatches between their Layer 2 chips and Layer 1 reserves, either through credit creation - issuing new chips while keeping reserves constant - or through reducing their reserves whilst keeping chips constant. To me, it's only in these situations where the two deviate that there's an active money creation process. So, I'm not saying the bank *cannot' use their reserves, but I am saying that the creative money issuance only occurs when the deviations happen
Very useful and helpful. Thank you for laying it out descriptively and with your simple, yet clever illustrations. 😊
I'm super curious about the ways in which our living systems integrate with the monetary system. I have not read all your articles yet, so I'm not sure if or how extensively you've covered this angle.
I've written about it a little (for a beginner audience) and explored and read about it a lot.
I'd be intrigued to hear your thoughts on some of this. I know this is a rapidly evolving topic (money and currency in general).
Thanks for writing about it simply and coherently. It's important!
I'm really glad you like it Liz. I often view the modern monetary system as being like a (disassociated) nervous system embedded into an underlying economy made up of people and ecological systems (this is actually one reason for the title 'Altered States of Monetary Consciousness' - thinking about how to restore more feeling and connection into this 'nervous system'), but I don't have a specific piece that focuses on that here right now (although my book Cloudmoney has quite a lot on that). I'll definitely write more on it in future, but for now you might find Money Through the Eyes of Mowgli of interest https://brettscott.substack.com/p/money-through-mowglis-eyes, because it touches on that topic tangentially
I really appreciate the chance to see your writings, Brett. I share with other commenters the opinions about your clear, didactic and kind way of explain this always hidden subject.
I share with Liz the concern about the relationship between the systems -- physiological-psychic (cultural in wide sense) -- economic (in strict sense)-political [social] -- that support human groups in connection with the environment and among them, the conformation of the economic systems of social organization, etc. These dissimilar systems communicate through special languages: just as in biology chemical signals result in nerve impulses and movements, money is a transducer between biological-microsocial systems, urban conglomerates and the substantive economy. There is an important theme.
Another issue is the possibility of playing dynamically your ideas with models. I think in people interested in modeling could help using the knowledge from your "altered states…"
An example of modeling with good intentions: Tim Gooding, 2019, Economics for a Fairer Society. Going Back to Basics using Agent-Based Models, at https://www.comses.net/codebases/2fd53b66-31a8-4031-9ae6-d39d0b818d1b/releases/1.2.0/
Hi Oscar, thanks for the comments and support! Yes I'm really interested in going deeper into nervous system metaphors, and appreciate your additions here. I'd love to work with modelers. More to come!
I look forward to digging into these. 😊
Curious your thoughts on New Money for a New World? If you care to comment on that. It's been a few years, but I learned a lot from it.
I respect Bernard's work, but probably not enough space in this comments section to go into it right now! There are echoes of his style of thought in my piece Zero is the Future of Money, but maybe I'll try do a deep dive into that particular book at some point (I'm thinking of launching a series for my paying subscribers where I do deep readings of big money books)
Interesting....
I got to work with Bernand a little. Absooutley fascinating.
The atchitecture of currency design keeps me thoroughly intrigued.
But it always comes back to the question of intrinsic value for me. And for that, I find that I regularly return to the ideas of living capital, social capital etc.
I'll be writing about some of these ideas as I get to them. I don't think they have enough attention yet within my circles.
Sometimes it is simply about bringing the ideas of one system into the consciousness of an overlapping system. I like your analogy to the nervous system.
I'm eager for your next piece.
Great - please do feel free to share that writing with me when you get to it!
Will do. Where do I find your email?
(I'm not on social media)
Crypto vs/aligns with Carbon Credits.
Brett, there is just one thing with the whole post that keeps puzzling me a bit. Regarding the statement "....or through reducing their reserves whilst keeping chips constant" I wonder what such a scenario would entail. How can the bank reduce their 'cash' reserves while keeping their liabilities constant? Does that mean using reserves to purchase some kind of an asset, like a building? Could you provide an example?