Grignon’s
videos do a good job of introducing people to the basics of banking and money
creation. But after those introductions, the videos go astray.
At least
that’s true of the two videos of his that I’ve watched. I don’t have time to
wade thru them all.
One of
Grignon’s videos goes wrong (at around 24.00) where it claims that interest
cannot be repaid because only enough money has been lent into the economy to
supply loans: not enough has been loaned out to pay interest as well. That
answer to that is as follows.
Commercial
banks in the aggregate do not make loans and then ask for the whole lot to
be repaid plus interest (as Grignon implies). What actually happens is that borrowers are
CONTINUOUSLY taking out loans and repaying them. Thus IN THE AGGREGATE loans
are never repaid. Plus of course borrowers pay interest to banks: indeed, the
latter is banks’ main source of income.
But what do
banks do with that income? Well just like firms in any other sector of the
economy, they don’t just sit on the money! They SPEND IT – on staff costs,
office building costs, computers, payments to shareholders: the list is
endless.
In short,
banks’ income (i.e. interest) is re-cycled into the economy in general. So that
disposes of Grignon’s claim that bank lending leads to bankruptcy or similar
for the population as a whole.
Without
lending there’d be no money?
A second
myth pushed in one of Grignon’s videos is the idea that since private banks
lend money into existence, it follows that without lending and debt there’s be
no money. That idea appears about 20 minutes into this video.
One answer
to the above idea is: what about central banks?
In other
words if there WERE A significant drop in the amount borrowed, there would
indeed be a decline in the money supply, the effect of which would be
deflationary: unemployment would rise. But there is a simple solution:
commercial banks are not the only institutions that create money – central
banks do as well.
Indeed, at the
time of writing we are in the middle of a scenario of very much the above sort.
That is, commercial banks have cut lending over the last two years or so (or,
same thing, the private sector is paying off debts). As a result, central banks
have stepped in and boosted the money supply big time under the guise of
quantitative easing.
And I’m not
suggesting that QE is good way of countering the above caution in the private
sector, but it’s better than nothing.
Let’s
ignore central banks.
Ignoring
central banks and concentrating on commercial banks, is it true to say that
that money creation by the latter results in debt? Well the latter idea is
EXTREMELY debatable, and for the following reasons.
Let’s assume
that no one wants to borrow anything but that the population (unsurprisingly)
DOES WANT a supply of money with which to conduct normal commercial and day to
day transactions. Indeed, without that money, there’s be a drastic contraction
in economic activity. Or at least people would be reduced to barter: a method
of exchanging goods and services which is alright in very simple economies, but
which is useless in sophisticated economies which have several million
different products on offer.
So let’s say
(to keep things simple) that everyone opens an account at a bank, deposits collateral,
and as a result has their account credited. Now at that stage, what debt
exists?
Banks would
owe collateral to depositors, which is a sort of debt. While depositors would
not owe anything to banks because they have not yet made use of their overdraft
facilities.
Thus far
from ordinary, hard done by people owing anything to banks, it’s actually the
other way round: banks owe people!
People
start spending money.
But of
course people and firms arrange overdraft facilities so as to SPEND some or all
the relevant money. Now there is a
problem here for the Grignon theory, which is that money spent by one person
for firm must be received by another. Thus if where one person uses their
overdraft facility and goes into debt to their bank, someone else must do the
opposite, that is deposit money in their account. And that means the relevant
bank is in debt to the depositor!!!!
So overall,
people and firms (i.e. private sector non-bank entities) are never in debt to
banks.
Distinguishing administration costs from interest.
Next, to the
extent that money creation DOES RESULT in debt, what’s the problem? I don’t
mind being a TRILLION DOLLARS in debt, just as long as I don’t pay any interest
on the debt.
So when it
comes to money creation, do commercial banks charge interest? The answer
(surprisingly) is “no”. Banks certainly charge for the ADMINISTRATION COSTS
involved in money creation and they charge something to cover bad debts, and
that is perfectly reasonable. But
they’ve no reason to charge interest. (I’m assuming that “interest” is a
payment made by a debtor (who wants to spend money and consume real resources)
to a creditor (who charges said “interest” for the pain involved in abstaining
from consuming resources, or “forgoing consumption”).
Where a bank
simply supplies money or “monetises an asset” there is no foregone consumption
and thus no reason to charge interest.
Of course in
the real world, the so called interest charged by banks INCLUDES enough to
cover administration costs: staff costs, the costs of equipment, printing
costs, the costs of maintaining branch buildings, etc. Plus banks have to
charge for RISK (i.e. for bad debts). Thus the word “interest” as used by banks
is misleading. Put another way, if banks were to be strictly accurate, they’d
split the so called interest they charge into “real interest” and “other
costs”. But borrowers are not interested in details like that, so banks don’t
bother.
Loans and
forgone consumption.
I said above
that when supplying money rather than making a loan, no one has to forgo
consumption. That might seem questionable given that the only purpose of obtaining a loan is to
spend the relevant money, i.e. consume resources.
But remember
that the whole purpose of having a form of money is (as pointed out above) to
avoid the inefficiencies of barter.
Thus on the
subject of consuming resources, as long as any extra demand stemming from money
creation is matched by bringing into productive use resources which are waiting
there to be used, no inflation will ensue. That is, as long as the extra demand
that results from money creation is matched by the increased efficiency that
comes from converting to a money economy from a barter economy, no inflation
will ensue.
To be
accurate, there are actually circumstances in which money creation by private
banks IS INFLATOINARY. Those circumstances are set out by George Selgin. But let’s just say, and with a view to
keeping things simple, that I’ve assumed a “non-Selgin” scenario.
Conclusion.
There is a
sense in which money creation by commercial banks (as distinct from extending
loans) results in no net debt. But even if you want to argue that money
creation gives rise to a debt, there is no reason for a commercial bank to
charge interest (as distinct from charging for administration costs). So what’s
the problem? Darned if I know.
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