The truth is out: money is just an IOU, and the banks are rolling in it

The Guardian ^ | 18 March 2014 | David Graeber

[Lorianne]

The Bank of England's dose of honesty throws the theoretical basis for austerity out the window ___ Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

[aMorePerfectUnion]

“Bitcoin has no intrinsic value and can disappear into the ethernet in one keystroke.”

Dollars have no intrinsic value and can disappear in a fire or can be seized by a number of Federal agencies at the stroke of a key.

[Toddsterpatriot]

Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

I guess they could default, and get foreclosed. Or continue paying.

Of course, in the US, banks are lending trillions to our Central Bank, not borrowing.

[CodeToad]

“Don’t forget to ignore the over $300 billion in gold as well. “

The gold is the ONLY backing. Promises of more promises is just plain stupid to think as backing. So, $300 billion versus the $17 trillion owed. I am not so sure a bank would accept a $300 item to secure a $17,000 debt.

[Toddsterpatriot]

Promises of more promises is just plain stupid to think as backing.

Right. Because $4 trillion worth of stuff that pays $100 billion a year in interest is meaningless. LOL!

So, $300 billion versus the $17 trillion owed.

The Fed doesn't owe $17 trillion.

[Pelham]

“the Federal Reserve promissory notes people carry around in their wallets”.

I don’t know that promissory notes is an accurate description. That would imply that they could be exchanged for “real” money or specie, and in our current monetary regime FRNs are the real money.

Federal Reserve Notes more closely resemble the “bank money” or “credit money” that private banks created before the Federal Reserve existed. “Credit money” was unbacked currency that constituted the credit portion of the money supply during the gold standard. It was created by banks, often against “real bills”- google “real bills doctrine” and you’ll get an idea of what that is all about.

FRNs also resemble Greenbacks or US Notes which were another unbacked currency issue that circulated during the gold standard. There was plenty of unbacked money circulating during the gold standard- it essentially was the portion of the American money supply that disappeared when banks failed during the Depression, and the disappearance of this money is what created the massive deflation of that time.