I’m not sure this is right, but what I’m getting from this is that money has a psycho-mathematical ontology. It is subject to nomothetic mathematical operators, but it is also fundamentally “of the mind”, and this renders it hard to think about except in terms of analogy and metaphor. The challenge is finding the metaphors that provide a coherent image when applied to the various facets or types of money.
Brett, I've recently written on The Deficit Myth and The Surplus Myth, which looks at how money is created, allocated and destroyed.. and who benefits, and the impacts on the economy, looked at in accounting terms across the Profit and Loss and Balance Sheet of both the Government and the Private Sector
As to your final question, I reframe "deposits" as "receivables."
But that changes the entire frame from something sitting statically in an account, whether we call that our "deposit" or "the bank's asset," to the interplay of receivables and payables.
While I admit that a business, just ignoring the topic of overdraft accounts, would need to keep an amount in reserve against mismatch of timing issues, the basic thrust of where a business is paying its payments out of in this way of looking at accounts is not out of this static reserve but out of its receivables, or, even better, out of this balance of payables and receivables.
As always a well written story to explain these basic truths about banking and the money they create.
Just to be a bit of a spoiler, banks were invented in Italy several centuries ago and these early bankers needed a term for the amount of money put on the table by their customers. (btw. The word bank is derived from an Italian word that meant table) These bankers used the word 'deposito' for these coins put down on the table. In Dutch a fixed term debit is called a "deposito," and a payment to a (saving-) bank een "inleg" (EN:inlay) en the amount on the account a "saldo," an other Italian word. the word for bank account used to be "conto", in more modern Dutch it is "rekening" (EN:account).
I don't think there is a need to update the Dutch dictionary to clarify what banks are doing when I deposit money :-)
Yes in a way, the deposit becomes a liability because the bank must be able to issue the money when the depositor requests to withdraw it.
And the entire fractional reserve banking is how our economy system prints money. Without this fractional reserve, there's no growth, and consequently, no cycles of inflation and contraction.
I’m not asking you anything more than to explain how your system works in practice given the things that people want to do, like make gifts and buy houses and gamble, etc. if you think you can force people to change just so the system accords with some purely mathematical theorem, I’m afraid you are in for a sad awakening.
Any system must accord with human nature or it is bound to fail. It’s why all the ‘isms’ fail. They are nice in theory, but get taken over by real people who are interested in power.
There are ways to improve our system, but appealing to our better natures alone is not one of them.
What is more, I bet that if you represent what you assume is "necessary" mathematically, you will see that what we say is necessary to preserve valid records of value. Can you model your assumptions mathematically? Here is an example:
"Whether I keep the units or transfer them for any reason or have them stolen, does not alter the nature of the units."
Not true, for the unit to act as a valid measure/record of value of goods/services transacted, then each measure/record must be unseverable from each corresponding transaction. That is, it cannot itself be transacted as an "asset" as is currently affirmed by the BoE [1], and Bain & Co. [2].
If it makes no sense to transfer meter measures between different building projects, just because all the measures are in valid meter units, why would it make sense with measures of value?
The reason is because "money" is not considered to be just a record of value, it is considered to be a negotiable "asset" and to act as a license conferring rights to those who possess units, no matter how they are obtained. This conflation while intuitively compelling is logically incoherent as proven under the prism of formal logic. [3]
Answering the claim that currently money is NOT misrepresented as both a "record/measure" of value and an object of trade but rather it is "just a record of value".
For money to be a record of value attributed to goods and services transacted, then each record can only correspond to one instance of goods and services. Consider the following:
John transacts value x giving rise to record X and Martha transacts value y giving rise to record Y. Then:
value represented (x +y ) = records X+Y
Now if John lends Martha record X to represent value y then we have:
value represented (x + y) = Record X. Which doesn't work.
Which is why Central Banks had to (finally) admit that Banks do not lend their depositors funds "... bank lending creates deposits" [1]
Thus, even according to the current banking system what you describe as one person's funds being lent to another as a "security", simply doesn't happen.
What actually happens, is that each "loan" gives rise to "new money" backed by otherwise free-hold collateral and is "lent into circulation". Such that at any point in time, there is a fixed quantity of pledged collateral represented by a principal sum, over a period of time and at some rate of interest.
Thus:
P = Outstanding Principal
I = Total interest over k periods.
i = interest payment per period
p = principal contributions to payments.
k = remaining periods within the term of the loan.
And, the standard equation for outstanding debt over k periods is:
Debt = P(1+ik).
Note too, P also represents all units in "circulation" and is cancelled out when paid, such that at any period k where P > 0, then Debt > P (i.e. debt exceeds the amount of money in circulation at all points in time).
This is a simple interest model that only gives us a gist. In reality, the evaluation of the collateral generally includes its full cost and some, incorporating past interest payments and/or percent based charges, therefore introducing compounding.[2]
Giving rise to an exponential model, Debt = P(1+i)^k,
The important things here are:
1) Money is lent (created) into circulation and cancelled out when returned.
2) Money has a per unit cost (percent based) over time i.e. its use has a cost that DOESN'T CORRESPOND TO ANY DISCRETE MEASURE OF GOODS AND SERVICES PROVIDED BY THOSE CHARGING THE FEES, BUT BASED ON VALUE CREATED BY OTHERS!
3) 2/3 of all financial assets are said to be purely of the "financial economy" where they are used as profit generating "assets" on par and interchangeable with real world assets (goods and services). [3]
So, money is used as an asset and indeed considered on par with goods and services given it is used as collateral. Therefore it is not used as "just an annotation" i.e. the concepts of measure and commodity are axiomatically conflated, without noticing how those concepts, under the prism of formal logic, are necessarily mutually exclusive, constituting a misrepresentation of the facts [4]. Misrepresentation is considered fraudulent if there is reckless disregard for the truth of the misrepresentation [5].
We all need to understand fully how this is indeed the case as wittingly or not, it is the dynamics of the money system itself that acts as a "hidden hand" governing society over and beyond the will of any individual agents acting under it.
As you can see, we are not talking flippantly off the top of our heads, this is perhaps the most serious issue facing mankind, today. We therefore must all be very diligent and careful, requiring the kind of common framework that the logic and formal rigour of applied science brings and in particular dynamical systems engineering.
To make a long story short: a "deposit" is a social relationship between the bank and the depositor. A social relationship, here: a debt relationship, is not "issued" but arises on the basis of a legally binding agreement between two parties. Something that is "issued" must be a thing in the sense of property law, such as the casino chips that can be handed over, but what is created when a deposit is made is a debt relationship that arises between the depositor and the recipient, but which is not securitized. (Casino chips, on the other hand, are the securitization of a claim!) However, these relationships are defective as debt relationships because a debt includes a date on which the debt must be settled. Since this is not the case with "deposits", these can be correctly classified as an option right for the depositor, which gives the depositor the option of whether and when he can order the bank to pay out money to him (withdrawal) or to bring about a debt relief success in his favor (money transfer). What has become an option for the depositor is a pending obligation for the bank, which does not know whether or when it will be called upon.
It should be made clear that these debt relationships are not issued but merely documented, because an account statement is evidence of the existence of a debt relationship but not a right to claim, such as a bill of exchange. In this respect, it is an unfortunate choice to use the term "digital bank chips" for "deposit", because although an account statement INDICATES a debt relationship, it IS not a debt relationship or a claim title. This can be illustrated by the fact that you do not eat the menu in a restaurant, which SHOWS the dishes, but the menu delivered after ordering. In contrast, the corrected Webster definition is somewhat better, because it refers to the fact that the bank confirms this (new) pending obligation, even if confirming is different from issuing.
However, bankers will have little interest in informing bank customers that, as the owner of a deposit, they are giving instructions to the bank and not contracts which can be negotiated. This is because banks - as long as it is not illegal - have no right to refuse a payment instruction, so in this respect they are recipients of commands and not equal partners. The term "deposit" is therefore more a disguise of the fact that the money is owned by the bank, as correctly described in the article.
In accounting terms, the bank simply makes two entries on its Balance Sheet: Debit Loan and Credit Deposit in the same name. The double entry keeps the banks books in balance, while the debit records the amount to be repaid by the borrower, and the credit records the amount of 'cash' the borrower can draw down. In fact, cash is rarely drawn out. Often, the borrower simply instructs the bank to 'pay' another party. In this case, no money goes to the new bank. Just a message telling the payee's bank to add to the payees bank account the amount specified by the borrower. At the same time, the borrower's bank reduces their deposit by the same amount.
Presumably if you lived in some communist utopia where all of the clothing was “one size fits all” and entirely fungible, you’d be able to gamble with your cloakroom ticket?
I don't see how the coat check analogy applies. Deposits in *every* business -- casinos, rental properties, banks -- are put on the balance sheet as assets with offsetting liabilities. Even SaaS companies do that when you pay a year in advance; they recognize the revenue over time.
But the nightclub does not put your coat on the balance sheet.
Also, economists and especially regulators use "reserves" to measure the health of deposit/liability ratios.
I’m not sure this is right, but what I’m getting from this is that money has a psycho-mathematical ontology. It is subject to nomothetic mathematical operators, but it is also fundamentally “of the mind”, and this renders it hard to think about except in terms of analogy and metaphor. The challenge is finding the metaphors that provide a coherent image when applied to the various facets or types of money.
Brett, I've recently written on The Deficit Myth and The Surplus Myth, which looks at how money is created, allocated and destroyed.. and who benefits, and the impacts on the economy, looked at in accounting terms across the Profit and Loss and Balance Sheet of both the Government and the Private Sector
https://medium.com/@michael-haines/modern-monetary-theory-is-not-a-theory-its-how-the-system-works-b0c0fe59b6d6
As to your final question, I reframe "deposits" as "receivables."
But that changes the entire frame from something sitting statically in an account, whether we call that our "deposit" or "the bank's asset," to the interplay of receivables and payables.
While I admit that a business, just ignoring the topic of overdraft accounts, would need to keep an amount in reserve against mismatch of timing issues, the basic thrust of where a business is paying its payments out of in this way of looking at accounts is not out of this static reserve but out of its receivables, or, even better, out of this balance of payables and receivables.
https://open.substack.com/pub/hardcurrency/p/payment-versus-asset-frame?r=1f57bz&utm_campaign=post&utm_medium=web --what's with the long link Substack gives us.
I propose for loans: "fodder".
For "deposits": "fodder's autostocks"
As always a well written story to explain these basic truths about banking and the money they create.
Just to be a bit of a spoiler, banks were invented in Italy several centuries ago and these early bankers needed a term for the amount of money put on the table by their customers. (btw. The word bank is derived from an Italian word that meant table) These bankers used the word 'deposito' for these coins put down on the table. In Dutch a fixed term debit is called a "deposito," and a payment to a (saving-) bank een "inleg" (EN:inlay) en the amount on the account a "saldo," an other Italian word. the word for bank account used to be "conto", in more modern Dutch it is "rekening" (EN:account).
I don't think there is a need to update the Dutch dictionary to clarify what banks are doing when I deposit money :-)
Yes in a way, the deposit becomes a liability because the bank must be able to issue the money when the depositor requests to withdraw it.
And the entire fractional reserve banking is how our economy system prints money. Without this fractional reserve, there's no growth, and consequently, no cycles of inflation and contraction.
This is an excellent explanation of how it works.
It seems this little article explains it even more sufficiently than the entire first chapter of Money as Debt.
It is hard for people to grapple that banks aren't digital vaults and such.
I wonder how many years it will take for everyone agrees that the 'credit creation of money' is the most accurate form of how it works.
First article that I have received from you. Glad I subscribed!!
I’m not asking you anything more than to explain how your system works in practice given the things that people want to do, like make gifts and buy houses and gamble, etc. if you think you can force people to change just so the system accords with some purely mathematical theorem, I’m afraid you are in for a sad awakening.
Any system must accord with human nature or it is bound to fail. It’s why all the ‘isms’ fail. They are nice in theory, but get taken over by real people who are interested in power.
There are ways to improve our system, but appealing to our better natures alone is not one of them.
What is more, I bet that if you represent what you assume is "necessary" mathematically, you will see that what we say is necessary to preserve valid records of value. Can you model your assumptions mathematically? Here is an example:
http://bibocurrency.com/images/pdfdownloads/Formal%20Stability%20Analysis%20and%20experiment%20%28final%29%20rev%203.4.pdf
"Whether I keep the units or transfer them for any reason or have them stolen, does not alter the nature of the units."
Not true, for the unit to act as a valid measure/record of value of goods/services transacted, then each measure/record must be unseverable from each corresponding transaction. That is, it cannot itself be transacted as an "asset" as is currently affirmed by the BoE [1], and Bain & Co. [2].
If it makes no sense to transfer meter measures between different building projects, just because all the measures are in valid meter units, why would it make sense with measures of value?
The reason is because "money" is not considered to be just a record of value, it is considered to be a negotiable "asset" and to act as a license conferring rights to those who possess units, no matter how they are obtained. This conflation while intuitively compelling is logically incoherent as proven under the prism of formal logic. [3]
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
[2] https://media.bain.com/Images/BAIN_REPORT_A_world_awash_in_money.pdf
[3] http://bibocurrency.com/index.php/downloads-2/19-english-root/learn/196-money-commodity-or-measure
Answering the claim that currently money is NOT misrepresented as both a "record/measure" of value and an object of trade but rather it is "just a record of value".
From a previous comment in another thread,
___________________________________________________________________________________
For money to be a record of value attributed to goods and services transacted, then each record can only correspond to one instance of goods and services. Consider the following:
John transacts value x giving rise to record X and Martha transacts value y giving rise to record Y. Then:
value represented (x +y ) = records X+Y
Now if John lends Martha record X to represent value y then we have:
value represented (x + y) = Record X. Which doesn't work.
Which is why Central Banks had to (finally) admit that Banks do not lend their depositors funds "... bank lending creates deposits" [1]
Thus, even according to the current banking system what you describe as one person's funds being lent to another as a "security", simply doesn't happen.
What actually happens, is that each "loan" gives rise to "new money" backed by otherwise free-hold collateral and is "lent into circulation". Such that at any point in time, there is a fixed quantity of pledged collateral represented by a principal sum, over a period of time and at some rate of interest.
Thus:
P = Outstanding Principal
I = Total interest over k periods.
i = interest payment per period
p = principal contributions to payments.
k = remaining periods within the term of the loan.
And, the standard equation for outstanding debt over k periods is:
Debt = P(1+ik).
Note too, P also represents all units in "circulation" and is cancelled out when paid, such that at any period k where P > 0, then Debt > P (i.e. debt exceeds the amount of money in circulation at all points in time).
This is a simple interest model that only gives us a gist. In reality, the evaluation of the collateral generally includes its full cost and some, incorporating past interest payments and/or percent based charges, therefore introducing compounding.[2]
Giving rise to an exponential model, Debt = P(1+i)^k,
The important things here are:
1) Money is lent (created) into circulation and cancelled out when returned.
2) Money has a per unit cost (percent based) over time i.e. its use has a cost that DOESN'T CORRESPOND TO ANY DISCRETE MEASURE OF GOODS AND SERVICES PROVIDED BY THOSE CHARGING THE FEES, BUT BASED ON VALUE CREATED BY OTHERS!
3) 2/3 of all financial assets are said to be purely of the "financial economy" where they are used as profit generating "assets" on par and interchangeable with real world assets (goods and services). [3]
So, money is used as an asset and indeed considered on par with goods and services given it is used as collateral. Therefore it is not used as "just an annotation" i.e. the concepts of measure and commodity are axiomatically conflated, without noticing how those concepts, under the prism of formal logic, are necessarily mutually exclusive, constituting a misrepresentation of the facts [4]. Misrepresentation is considered fraudulent if there is reckless disregard for the truth of the misrepresentation [5].
We all need to understand fully how this is indeed the case as wittingly or not, it is the dynamics of the money system itself that acts as a "hidden hand" governing society over and beyond the will of any individual agents acting under it.
As you can see, we are not talking flippantly off the top of our heads, this is perhaps the most serious issue facing mankind, today. We therefore must all be very diligent and careful, requiring the kind of common framework that the logic and formal rigour of applied science brings and in particular dynamical systems engineering.
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
[2] http://bibocurrency.com/index.php/downloads-2/19-english-root/learn/286-the-beast-of-compounding
[3] https://media.bain.com/Images/BAIN_REPORT_A_world_awash_in_money.pdf
[4] http://bibocurrency.com/index.php/downloads-2/19-english-root/learn/300-you-have-been-served
[5]https://thelawdictionary.org/article/3-types-misrepresentation-matter/
To make a long story short: a "deposit" is a social relationship between the bank and the depositor. A social relationship, here: a debt relationship, is not "issued" but arises on the basis of a legally binding agreement between two parties. Something that is "issued" must be a thing in the sense of property law, such as the casino chips that can be handed over, but what is created when a deposit is made is a debt relationship that arises between the depositor and the recipient, but which is not securitized. (Casino chips, on the other hand, are the securitization of a claim!) However, these relationships are defective as debt relationships because a debt includes a date on which the debt must be settled. Since this is not the case with "deposits", these can be correctly classified as an option right for the depositor, which gives the depositor the option of whether and when he can order the bank to pay out money to him (withdrawal) or to bring about a debt relief success in his favor (money transfer). What has become an option for the depositor is a pending obligation for the bank, which does not know whether or when it will be called upon.
It should be made clear that these debt relationships are not issued but merely documented, because an account statement is evidence of the existence of a debt relationship but not a right to claim, such as a bill of exchange. In this respect, it is an unfortunate choice to use the term "digital bank chips" for "deposit", because although an account statement INDICATES a debt relationship, it IS not a debt relationship or a claim title. This can be illustrated by the fact that you do not eat the menu in a restaurant, which SHOWS the dishes, but the menu delivered after ordering. In contrast, the corrected Webster definition is somewhat better, because it refers to the fact that the bank confirms this (new) pending obligation, even if confirming is different from issuing.
However, bankers will have little interest in informing bank customers that, as the owner of a deposit, they are giving instructions to the bank and not contracts which can be negotiated. This is because banks - as long as it is not illegal - have no right to refuse a payment instruction, so in this respect they are recipients of commands and not equal partners. The term "deposit" is therefore more a disguise of the fact that the money is owned by the bank, as correctly described in the article.
In accounting terms, the bank simply makes two entries on its Balance Sheet: Debit Loan and Credit Deposit in the same name. The double entry keeps the banks books in balance, while the debit records the amount to be repaid by the borrower, and the credit records the amount of 'cash' the borrower can draw down. In fact, cash is rarely drawn out. Often, the borrower simply instructs the bank to 'pay' another party. In this case, no money goes to the new bank. Just a message telling the payee's bank to add to the payees bank account the amount specified by the borrower. At the same time, the borrower's bank reduces their deposit by the same amount.
Presumably if you lived in some communist utopia where all of the clothing was “one size fits all” and entirely fungible, you’d be able to gamble with your cloakroom ticket?
I don't see how the coat check analogy applies. Deposits in *every* business -- casinos, rental properties, banks -- are put on the balance sheet as assets with offsetting liabilities. Even SaaS companies do that when you pay a year in advance; they recognize the revenue over time.
But the nightclub does not put your coat on the balance sheet.
Also, economists and especially regulators use "reserves" to measure the health of deposit/liability ratios.