Wednesday, 14 March 2012

Frederick Soddy.

MMT bloggers will be familiar with joebhed, but most of them won’t be aware that the picture that appears alongside joebhed’s comments is a picture of Soddy.

Soddy was a chemistry Nobel laureate who wrote a book on money in 1934: “The Role of Money”. It’s available for free on the net. Having skimmed thru it, here are my impressions, for what they’re worth.

If you want just to skim thru, miss out Ch 1: it’s of doubtful quality.

Soddy favours full reserve banking. He has an interesting definition of money. On p.40, under the heading “Money a Claim to What Does not Exist.” he says, “The essential feature of money is . . . that it is a legal claim to wealth over and above the wealth in existence, all of which in an individualistic society is already in the ownership of others independently of this claim.”

That definition has not caused me to change my own ideas about money, but watch this space.

On p.53 he claims that the more enthusiastic advocates of full reserve grossly overestimate the benefits of full reserve. So there’s nothing new under the sun: these over-enthusiastic advocates are still with us in 2012 – no names mentioned.

P.63 & 112. Soddy is concerned about the distinction between current or “checking” accounts and deposit accounts. He says the former is money and the latter is not.

I don’t think he gets the really important point here, which is that using money in checking accounts to fund long term loans (i.e. “borrow short and lend long” or “maturity transformation”) leads to bank fragility. And the same goes for accounts which are supposedly deposit accounts, but where the money deposited is actually available to the depositor very quickly and with little by way of penalty - like lost interest.

P. 79. In case you thought the revolving doors that connect the banking elite to the political elite are something new, they’re not. These revolving doors existed in Britain in the 1920/30s. (No doubt they existed in Ancient Rome!)

P.106. Soddy gets the point that economising on the stock of money is pointless. I.e. maturity transformation, while it seems to make sense at the micro-economic level, is a pointless activity for the country as a whole, i.e. at the macroeconomic level. Or 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.”

I.e. he gets very near to the idea that maturity transformation might as well be banned, because it achieves nothing, except contributing to bank fragility. But he doesn’t quite get there – or perhaps I’m doing him an injustice.



  1. Do you think only banks have to banned from maturity mismatch or businesses too?

  2. Money4nothing, Good question. I hadn’t thought of that one. I think my answer is “just banks” because there are serious potential effects arising from banks doing maturity transformation: bank fragility, etc. In contrast, when businesses borrow, it’s normally in the form of bonds which take a year or two minimum before maturity is reached. So there is not so much “borrow short and invest long” going on there.

    But if a business DOES borrow by allowing all and sundry to open instant access accounts at the business, then it’s starting to act like a bank, and should obey the same rules as banks.

  3. imo the very nature of credit creation is maturity transormation to begin with. I just read Billy Blog about the topic and the comments over there. Bill tends to think that It restricts government. My question: under what institutional arrangments? I got the same question for you.
    You tend to think that It makes the banking/ the whole financial system more stable. Credit risk remains. Bank runs are a liquidity problem, not a solvency problem and they can be eliminated totally by the central bank under functional regulations. But then again I don't know under what monetary regime you are advocating It.

  4. Money4nothing, The statement that “the very nature of credit creation is maturity transformation” is true in the sense that if one relaxes the rules governing MT, then banks will be able to lend more. But that’s not a brilliant idea if a side effect is worse bank fragility. A better option, as I’ve pointed out before on this site, is to leave the rules on MT untouched and expand the money supply where necessary. And personally I’d take that much further: more or less ban MT and make up that with a big money supply expansion.

    Re Bill Mitchell, I didn’t know he’d said much on MT. What’s the link? I couldn’t find anything by Googling.

  5. I must have misread him, he is talking about restricting government under the Austrian proposals. So yeah, he is not talking about restricting the government spending under 100% reserve system. Here is his comment:
    Dear Devin (and JKH and Scott)

    If the point of the 100-percent reserve banking system is to reduce bank losses then I fail to see how it does that unless it prohibits credit creation at all. As soon as the bank starts making loans (even if the funds lent are fixed-term deposits already acquired) then credit risk is possible. Widespread failures (defaults) are still possible which just means that at some point in the future (when the fixed-term deposits expire) the “bank run” occurs.

    In that sense, I don’t see the point of it and so I start thinking about the other motives that are behind the suggestion – the Austrian “sound money” motives – which in my view disable the capacity of the national government to pursue and achieve public purpose – full employment, equity in opportunity, environmentally sustainable growth, and price stability.

    best wishes

  6. my idea was that credit creation is MT,
    even when government deficit spends without issuing bonds It is 'maturity mismatch' 'cause receivers of the funds don't pay taxes at that moment.


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