Thursday, 11 April 2013

Why postive money have got it wrong: Banks do not create money.

This morning I stumbled across positive monies critique and solution to the banking and debt crisis.  After reading through it I remember AS level religious studies and the ontological argument for the existance of God. Which seemed fairly thorough until you start looking at the shaky principles on which it is founded.

The argument put forward by the positive monies (pm from herein) is that banks create money, there is even a "banking 101" section which shows the internal double enteries performed in a banks ledger claiming this to be proof. 

Banks cannot create money from accountancy, no more than a local wholesaler can conjur up sweets from accountancy. 

Think of your local shop.  It phones up it's  wholesaler and agrees to buy £100 worth of sweets to be delivered in a week.  The wholesaler now has both a payable (we owe  £100 of stock  in 7 days) and a recievable (we will recieve £100 of cash in 7 days).

Note no money has yet to be transfered here, yet the wholesaler in it's accounts (if it keeps them diligantly) will have both increased recivables and liabilities.  This is exactly the same transaction as you agreeing a loan with your bank, the only difference is one is trading in stock one in money.





We could not say that the local wholesaler has increased the number of sweets in the world by merely posting these journals in it's ledger.  Similarly, we cannot say the bank is creating money by doing the same thing.

In the same way, when the sweets need to be delivered or the money sent to Mr Smith the bank and wholesaler will need to own the actual monies /  sweets to deliver these to Mr smiths's accounts.    Thus they cannot possibly create money out of thin air, no more than they can create sweets out of thin air.