Friday, 28 July 2017

State issued money is better than privately issued money.

The superiority of state issued money can be illustrated by considering two hypothetical economies. In one, people and firms want a form of money, but there is negligible lending and borrowing: a “neither lender nor borrower be” economy if you like. And in the second hypothetical economy, there is a significant amount of lending and borrowing, but very little demand for money (i.e. little demand for idle balances in current / checking accounts).

In the first, the “want money but don’t want to borrow” economy (as in any economy) it would cost nothing to issue base money (i.e. state issued money). As Milton Friedman put it, "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."

In contrast, where a bank customer wants the bank to supply the customer with a stock of PRIVATELY ISSUED money, the bank has to check up on the credit-worthiness of the customer, perhaps take collateral off the customer, check up on the value of the collateral and allow for bad debts. Those items are significant costs.

Conclusion: the state issued money system is clearly cheaper to operate.

A “little demand for money” economy.

Now let’s consider an economy where there is negligible demand for money, but households and firms do want to engage in a significant amount of lending and borrowing. In that scenario, there is no difference as far as costs go between a “state money” system and private money system. Reason is that the above mentioned costs involved in lending (allowing for bad debts etc) apply in both cases. That is, ANY LENDER has to check up on the credit-worthiness of borrowers.

So to summarise, in the first hypothetical economy, state issued money is better than privately issued money, while in the second hypothetical economy neither a state issued nor a privately issued money system can be said to be better than the other. And since real world economies lie somewhere between the above two hypothetical extremes, it follows that state issued money is better than privately issued money.

Net financial assets.

And there is a final nail in the coffin of private money as follows.

When a private bank creates a dollar of money, it creates a dollar debt at the same time, or as the saying goes, private money “nets to nothing” (e.g. see this article by Bill Mitchell). Put another way, when the state creates money, there is rise in the private sector’s net financial assets, while that is not the case with private money creation.

But the private sector’s propensity to spend is clearly related to its stock of such assets (money in particular), in the same way as the propensity of a household to spend varies with the amount of money it has.

So…in a “private money only” system, the private sector has zero net financial assets, and that’s a problem because it is highly unlikely that a zero stock of net financial assets is enough to induce the private sector to spend at a rate that brings full employment. Put another way, given an attempt to implement a “private money only” system, it is likely the state will have to boost the private sector’s stock of money / financial assets with state issued money so as to bring about full employment.

Conclusion: privately issued money benefits the issuers of that money, i.e. Wall Street bankster / criminals,  but no one else.

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