Money isn’t Debt

My comments on blog Ralphonomics
“How Randall Wray should have attacked debt based money”


Interesting discussion…

Ralph> Money is debt owed by a bank to a bank customer.

Well, no, money isn’t debt. Money can’t be debt because money is an —asset— while debt is a —liability—. Money and debt are two, opposite, sides of the same coin (pun intended).

The best phrasing I could come up with, is that money is “a token of indebtedness” (token e.g. in the form of coins and notes) or “a transferable acknowledgment of indebtedness” (in the form of credit in a current account or similarly liquid and transferable account). Money is an asset in the hands of the bearer or account holder, corresponding to a numerically equal liability owed by the issuer of the token or account to the bearer or holder.

Bank money (as credit in current accounts) is acknowledgment of indebtedness of the bank to the account holder.

Base money (as coins and notes) are tokens of indebtedness of the issuing central bank or treasury. Base money (as reserves held by commercial banks at the central bank) are acknowledgments of indebtedness of the central bank to the commercial bank. This perspective of base money as token/acknowledgement of indebtedness (i.e. IOU’s) corresponds to the idea that base money derives its value from its being accepted by the state as settlement of debts to the state (such as taxes). It’s even printed explicitly on all dollar notes: “This note is legal tender for all debts, public and private“.

This is consistent with the view of Alfred Mitchell-Innes in his 1913/1914 papers
In the first article, p. 14, he even writes explicitly: “Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money.”

Ralph> How Randall Wray should have attacked debt based money.

This must be a slip of the pen or a strawman, Randall Wray doesn’t attack “debt-based money” at all. Actually he does the exact opposite, he mocks and adamantly rejects the idea of “debt-free money” because (in his view and consistent with comments above) money without the underlying notion of indebtedness doesn’t make sense. See his series of posts on the subject.

So, in summary:
(1) Money is not debt (it’s the opposite, i.e. credit)
(2) There is no money without debt (not even base money, since it’s logically equivalent to IOUs).

(End quote)

Ralph> Re Wray’s argument, his basic point if I’ve got it right etc.

Okay, my understanding of Wray’s position and line of argumentation corresponds to your description in this last paragraph.

Ralph> such money is a debt owed by a bank to someone with a credit balance in their account

Again, the whole confusion, with all people turning around in circles, saying and repeating the same things in opposite ways, and misconstruing each others arguments, arises from that misleading “money is debt” equation. No, money isn’t debt, it’s the reverse. From my perspective, my money in my bank account is my asset, it’s “plus” for me. From the perspective of the bank, there’s a corresponding debt in their books, a liability, in “minus” for them. Let’s stop equating money to debt. And also, let’s acknowledge that there can’t be money (for me) unless there’s a corresponding debt, with reverse sign (for the bank or some other entity). Evidently this applies to bank money, and I think everybody agrees on this.

Now what about base money, issued by “the sovereign” (central bank or treasury). There are two lines of thought.
(1) In the view of Mitchell-Innes, Randall Wray etc, base money can be understood and explained in logically the same way as bank money, with a liability on the sovereign. The sovereign acknowledges the liability by accepting the corresponding asset (the money) as settlement for debts of the bearer to the sovereign. Without such acknowledgment of liability, the money would lack its basis for value (that’s the basic Randall Wray “redemption” argument).
(2) Others (including you) claim that it’s different, for all sorts of reasons. Often they —want— it to be different in the hope of having debt-free money of some sort.

Well, both views have their merits. But let’s be clear…

Ralph> Add to that the fact the state can simply wipe out chunks of it’s so called debt whenever it wants via tax…

Whenever it wants? In any quantity it wants? These are unrealistic claims often heard in MMT circles, even though MMT-man #1 Randall Wray would not make such claims. In the real world, sovereigns —cannot— arbitrarily raise taxes, at will and as much as they please, because (1) populations may object and protest (democratically or violently), and (2) the maximum amount of collectible taxes is limited by the effect of the Laffer curve: beyond some tax rate, the collected amount doesn’t accrue but shrinks.

Ralph> For example £20 notes say that the Bank of England promises to “pay the bearer” £20

Pound notes are promissory notes, assets in the hand of the bearer, promises (i.e. liabilities, debts) for the issuer (BoE). Essentially same as any base money. The real value is the result of the pounds being accepted for settlement of taxes (it must be in the laws somewhere, though it’s not printed as such on the notes).

Re Donald’s promissory money: its value would be determined by (1) the perceived economic value of his promise, (2) the perceived likelihood that he actually honours his promise. My compatriot Bernard Lietaer has interesting things to say about such parallel privately-issued community monies (WIR, Torekes, Dora etc):

(End quote)

Money isn’t Debt

What % of money for loans comes from intermediation?

My comment at ralphonomics
What % of money for loans comes from intermediation?


Ralph> What % of money for loans comes from intermediation?

Exactly (1-RReff)x100 with RReff being the effective reserve ratio, RReff=R/M with R reserves and M bank loans.
I.e. at most (1-RRmin)x100 with RRmin being the minimum reserve ratio, where legally imposed (e.g. for USD).

Or also (1-1/m)x100 with m being the money multiplier, m=1/RR. On macroeconomic scale, the money multiplier can be estimated from monetary aggregates as monitored and published by central banks, as the ratio of broad money (M2) over base money (M0 or MB).


Numerically: with e.g. reserve ratio RR=0.1 (10%, minimum requirement for USA banks) or equivalently money multiplier m=10, 10% of loans is base money and 90% of loans is bank money.

(End quote)

— Ralph replies:


Strikes me your (1-reserves) percentage is the percentage of all money that is privately issued. I’m concerned with a different percentage, i.e. the percentage of money for loans comes from privately issued money which was created long ago (that’s the intermediation proportion) as compared to the proportion that is created on the spot and out of thin air for those wanting loans.

(End quote)

— My reply on that:


I’m trying to read your underlying intentions with this topic 😉

Presumably (as a full-reserve advocate) you’re trying to separate intermediation and creation, in the hope of finding a way to restrain the private sector to intermediation-only activities, while money creation would remain monopoly of the sovereign.

So here’s a paper that might be interesting:
“Intermediation, Money Creation, and Keynesian Macrodynamics in Multi-agent Systems”, Gibson and Setterfield, 2015

Abstract> Keynesian economists refer to capitalism as a monetary production economy, in which the theory of money and the theory of production are inseparable (Skidelsky, 1992). One important aspect of this, brought to light by Robertson following the publication of The General Theory, is that in a Keynesian economy, endogenous money creation is logically necessary if the economy is to expand. A Keynesian economy cannot operate with an exogenously given supply of money as in verticalism. One way to ensure that money is endogenous is to simply assume that the supply of money is infinitely elastic, known in the literature as horizontalism. In this view, prior savings cannot be a constraint on current investment and it follows that the level of economic activity is determined by effective demand. Using a multi-agent systems model, this paper shows that real economies, especially those subject to recurrent financial crises, can be neither horizontalist or verticalist. Horizontalism overlooks microeconomic factors that might block flows from savers to investors, while verticalism ignores an irreducible ability of the system to generate endogenous money, even when the monetary authority does everything in its power to limit credit creation.

In more mundane language: the authors argue that real economies can’t expand when the sovereign tries to impose a monopoly on money creation.
Note that endogenous money is bank-created money, exogenous money is sovereign money, also see

(End quote)

— My further comment


Ralph> Given the huge number of different things that have served as money thru history, I’m baffled as to why economic growth isn’t possible in an “exogenous money only” economy.

There is plenty of anthropological evidence that “exogenous-money-only” economies have never existed; prehistoric and historic economies have always used credit-debt accounting in one form or another (in people’s memories, on clay tablets, as tallies etc) according to the needs of the real economy. That is endogenous money. The exogenous monies available in limited quantities (such as coins, precious metals…) were often used only for transactions with the state (soldier salary payment, tax payment), for transactions between strangers, or for “clearance” (netting out accumulated mutual credit-debts among economic agents at more or less regular intervals). Cfr for instance “5,000 years of debt” by David Graeber (full text available on the web).

Further to the original question, there is a detailed and very instructive case study in section 3.2 “A Live Empirical Test” (p. 13 ff) in the paper
“Can banks individually create money out of nothing? — The theories and the empirical evidence” (R. Werner, 2014)

The findings are compatible with the “credit creation” hypothesis and incompatible with the “financial intermediation” and “fractional reserve” hypotheses. (p. 15)
Actually the case study confirms how commercial loans are booked in practice, by the creation of two matching records (with opposite signs) on the customer’s account, and corresponding records on the balance sheet, one at the asset side (as a loan under rubric “claims on customers”) and one at the liabilities side (as a customer deposit under rubric “claims by customers”).

Ultimately, and contrary to what many monetarists may believe, banks don’t lend money (or not) just because the money happens to be there (or not). Instead, banks provide new credit (against corresponding new debt) according to actual demand for credit from microeconomic agents (large, medium-sized and small firms; self-employed; households).

(End quote)

What % of money for loans comes from intermediation?

USA Banking Is De-Facto Full-Reserve

In the blogosphere there’s a lot of “campaigning” for full-reserve banking, with the aim of protecting depositor’s money against bank failures without burdening the taxpayers with deposit guarantee schemes.

The figure below shows the ratio of “Reserve Balances with Federal Reserve Banks” versus “Total Checkable Deposits” within the USA banking system. This ratio is roughly what full-reserve advocates have in mind — it is larger than 1 ever since Januari 2009. The USA banking system (taken as an aggregate) is “de facto” compliant with the wishes of the full-reserve people, even though it’s (probably) not the result of explicit policy targeting.

Source: article “Interest on reserves, Part III” by George Selgin

I leave it to the reader to make up his mind about the desirability of such de-facto full-reserve implementation. (Selgin isn’t particularly happy with interest on (excess) reserves.)


USA Banking Is De-Facto Full-Reserve

Greece’s Hope and Challenges for 2016

Copy of my comment at blog iGlinavos
“Hope for 2016, the lack of”


Who could be better placed for a to-the-point, sober and objective analysis than Mr Stournaras, governor of the Bank of Greece (i.e. the Greek subsidiary of the ECB)?

The full text deserves careful reading. It’s found here:

He concludes with to-do’s and hopes as follows:

> However, in order to succeed we need to overcome our own skepticism. We need to own these successes. We have to move forward and implement the program. We must take advantage of the state’s real estate assets, attracting direct foreign investments by updating land usage while respecting the environment. We need to include more privatizations in the program so we can reduce the primary surplus target, which would made the public debt sustainable. We need to move ahead with more reductions to non-targeted and also to specific but inadequately designed social expenditures, instead of choosing to raise taxes.

> We need to move ahead with a review and reduction of the some 1,800 legal entities that come under the state’s supervision; to implement plans for the mobility of personnel within the public administration; to put an end to the exemptions from general taxation regulations for specific groups of taxpayers that would allow, on a medium-term basis, the reduction of the overall level of taxation; and to put an end to exemptions from pension rules. Finally, we need to end fixed funding for local government, which is full of disincentives, and replace it with targeted spending.

> An exit from the crisis, a return to normality and a sustainable level of growth are all within reach. The government needs to implement the agreement it negotiated with the partners and adopt initiatives that will create more trust, taking advantage of the positive development in the recapitalization of the banks, which attracted private funds. The Hellenic Parliament, which from 2010 has supported the adjustment effort and, in effect, the salvation of the Greek economy, must obviously do its part to complete the legislative work outlined in the agreement, particularly since the larger part of the adjustment has already been achieved. Today, a new period of backsliding is out of the question.

(End quote)

Greece’s Hope and Challenges for 2016

A New Century for the Middle East

> What, then, should be done to bring about a new Middle East? I [the author Jeffrey D. Sachs] would propose five principles.

> First, and most important, the US should end covert CIA operations aimed at toppling or destabilizing governments anywhere in the world. The CIA was created in 1947 with two mandates, one valid (intelligence gathering) and the other disastrous (covert operations to overthrow regimes deemed “hostile” to US interests). The US president can and should, by executive order, terminate CIA covert operations – and thereby end the legacy of blowback and mayhem that they have sustained, most notably in the Middle East.

> Second, the US should pursue its sometimes-valid foreign-policy objectives in the region through the United Nations Security Council. The current approach of building US-led “coalitions of the willing” has not only failed; it has also meant that even valid US objectives such as stopping the Islamic State are blocked by geopolitical rivalries.

> The US would gain much by putting its foreign-policy initiatives to the test of Security Council votes. When the Security Council rejected war in Iraq in 2003, the US would have been wise to abstain from invading. When Russia, a veto-wielding permanent member of the Council, opposed the US-backed overthrow of Syrian President Bashar al-Assad, the US would have been wise to abstain from covert operations to topple him. And now, the entire Security Council would coalesce around a global (but not a US) plan to fight the Islamic State.

> Third, the US and Europe should accept the reality that democracy in the Middle East will produce many Islamist victories at the ballot box. Many of the elected Islamist regimes will fail, as many poorly performing governments do. They will be overturned at the next ballot, or in the streets, or even by local generals. But the repeated efforts of Britain, France, and the US to keep all Islamist governments out of power only block political maturation in the region, without actually succeeding or providing long-term benefits.

> Fourth, homegrown leaders from the Sahel through North Africa and the Middle East to Central Asia should recognize that the most important challenge facing the Islamic world today is the quality of education. The region lags far behind its middle-income counterparts in science, math, technology innovation, entrepreneurship, small business development, and (therefore) job creation. Without high-quality education, there is little prospect for economic prosperity and political stability anywhere.

> Finally, the region should address its exceptional vulnerability to environmental degradation and its overdependence on hydrocarbons, especially in view of the global shift to low-carbon energy. The Muslim-majority region from West Africa to Central Asia is the world’s largest populous dry region, a 5,000-mile (8,000 kilometers) swath of water stress, desertification, rising temperatures, and food insecurity.

> These are the true challenges facing the Middle East. The Sunni-Shia divide, Assad’s political future, and doctrinal disputes are of decidedly lesser long-term importance to the region than the unmet need for quality education, job skills, advanced technologies, and sustainable development. The many brave and progressive thinkers in the Islamic world should help to awaken their societies to this reality, and people of goodwill around the world should help them to do it through peaceful cooperation and the end of imperial-style wars and manipulation.

For the full text “A New Century for the Middle East”, see

A New Century for the Middle East

Bernanke’s Say on the Taylor Rule

My comment on Ralphonomics blog
“Interest rate adjustments are nonsense”


Ralph> By way of celebrating the recent rise in interest rates in the US, let’s run thru the litany of false logic behind interest rate adjustments.

It should be noted that the Fed is responsible for monetary policy (such as setting the Fed rate), and has no say on fiscal policy (gov’t spending and taxation). The policy makers at the Fed use the tools they’re allowed to use according to their mandate (which is double: to support US job growth while also keeping US inflation close to target in the medium term).

Within this context of setting central bank interest rate, today’s macroeconomists often refer to “the Taylor rule” as the formula that the Fed (and other central banks) are assumed to use or ought to use (as countercyclical policy, in order to keep the economy on track close to its output potential while avoiding bubbles).

Here is a very instructive discussion by previous Fed chairman Ben Bernanke:
“The Taylor Rule: A benchmark for monetary policy?”

Bernanke> The Taylor rule is a valuable descriptive device. However, John has argued that his rule should prescribe as well as describe—that is, he believes that it (or a similar rule) should be a benchmark for monetary policy. Starting from that premise, John has been quite critical of the Fed’s policies of the past dozen years or so. He repeated some of his criticisms at a recent IMF conference in which we both participated. In short, John believes that the Fed has not followed the prescriptions of the Taylor rule sufficiently closely, and that this supposed failure has led to very poor policy outcomes. In this post I will explain why I disagree with a number of John’s claims.

Then he argues several points: (1) historic Fed behaviour (analysed a posteriori) differs somewhat from the “original” Taylor rule, it’s better described by a “modified” Taylor rule (as explicitly given by Bernanke), (2) the claims of bad policy don’t stand scrutiny under this modified rule, (3) going on “auto-pilot” by applying the formula blindly isn’t possible and wouldn’t be wise, since the estimation of the input parameters is difficult and subject to good judgment.

(End Quote)

Bernanke’s Say on the Taylor Rule