Monetary Realism

Understanding The Modern Monetary System…

Frederick Soddy on Endogenous Money & Debt-Deflation

By Brett Fiebiger, PhD

“Soddy distilled his eccentric vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice. Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing.” – Eric Zencey, Mr. Soddy’s Ecological Economy, 11 April 2009.

Some economists are new to endogenous money though it is has long been recognised. Here is Frederick Soddy, Wealth, Virtual Wealth, and Debt, George Allen and Unwin, London, 1926, p. 147:


No doubt there are still many people, if not the majority, who will be frankly incredulous that money vastly exceeding in amount the total national money can be, and is created and destroyed by the moneylender with a stroke of the pen. How frequently does one still read in the Press that the banks can only loan their customers spare money! Most people still think of what money once was, “a public instrument owned and controlled by the State.”

Alas, nearly ninety-years later, the mainstream economics profession has yet to realise basic facts of how the modern monetary system functions. There is much relevance in Soddy’s work to those who deride followers of the endogenous money approach as “money mystics” and also to those who adhere to State-centric theories of money. More from Frederick Soddy, The Role of Money, George Routledge and Sons, London 1934, pp. ix-x:

“This book will show what money now is, what it does, and what it should do. From this it will emerge the recognition of what has always been the true rôle of money. The standpoint from which most books on modern money are written has been reversed. In this book it is not treated from the point of view of bankers—as those who create by far the greater proportion of money—but from that of the PUBLIC, who at present have to give up valuable goods and services to the bankers in return for the money that they have so cleverly created and create. This, surely, is what the public really wants to know about money.

It was recognised in Athens and Sparta ten centuries ago before the birth of Christ that one of the most vital prerogatives of the State was the sole right to issue money. How curious that the unique quality of this prerogative is only now being rediscovered. The “money power” which has been able to overshadow ostensibly responsible government, is not the power of the merely ultra-rich, but is nothing more nor less than a new technique designed to create and destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of the community or the real rôle that money ought to perform therein… To allow it to become a source of revenues to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government [Emphasis added].”

The context is that the banking community plus orthodox economists were denying that banks can create money ex nihilo; the former knowing full well the opposite to be true; and at least some of the latter also knowing but playing along. Why? Soddy (1934, p. 7) was not unaware of class issues: “Orthodox economics has never yet been anything but the class economics of the owners of debts.” Soddy (1934, p. 51):

The Banker as Ruler.—From that invention dates the modern era of the banker as ruler. The whole world after that was his for the taking. By the work of pure scientist the laws of conservation of matter and energy were established, and the new ways of life created which depended upon the contemptuous denial of primitive and puerile aspirations as perpetual motion and the ability ever really to get something for nothing. The whole marvellous civilisation that has sprung from that physical basis has been handed over, lock, stock, and barrel, to those who could not give and have not given the world as much as a bun without first robbing somebody else of it… The skilled creators of wealth [in industry and agriculture] are now become hewers of wood and drawers of water to the creators of debt, who have been doing in secret what they have condemned in public as unsound and immoral finance and have always refused to allow Governments and nations to do openly and above aboard. This without exaggeration is the most gargantuan farce that history has ever staged.

Why was Soddy so vehemently against the Bankers/Rentiers? Remember the context. We had in the 1920s simmering tensions over war reparations from World War I being fought for whose interests: those of the creditors within creditor nations. In the UK the complaint was that international debts were not being paid at the pre-war exchange rate parity. The world had also endured a history of certain banking houses (sometimes family) influencing public policy while maintaining a sham that private bankers were not money creators (clearly, purely historical because we solved Wall Street having too much influence on policymaking objectives that would assist Main Street). Later, in the 1930s amidst the Great Depression, it was financial interests who were the most vocal in advocating for sticking with the rigidities of fixed exchange rates with gold convertibility. Soddy (1926) called for fiat money and reiterated that call in the following quote:

Free the Exchanges.—As regards its external economic transactions, both with other nations and with the members of its own family, free the exchanges and put them also under national supervision. Let them find their own level and not drag down nations to the level of the lowest. Let us forget how many dollars in America, francs in France, or marks in Germany used to go to the pound under the gold-standard… Reduce gold to the rank of a commodity merely for convenient international settlement and let it be bought and sold like any other goods (Soddy, 1934, p. 122).

Frederick Soddy is an intriguing though largely omitted character in the history of economic thought. In 1921 he was awarded the Nobel Prize for Chemistry for pioneering work on atomic transmutation (including such things predicting as the existence of isotopes). Soddy was dismissed as a “crank” by his opponents on at least two occasions. Firstly, understanding the potentials of nuclear energy, he expressed concerned that a government might do something outrageous like use the power of radioactivity to make a weapon (say a nuclear bomb). He turned to the field of economics because he saw the intense competition amongst nations (wars for resources) and control over money as was what wrong with human civilisation. Soddy (1926, p. 23, 31):

Have we obtained dominion of the major powers of Nature to fall a victim to our own machinery and ultimately to be destroyed by it? Is our civilisation to end in breeding the Robot [war machines] and the rentier, and to go down under class conflicts at home and fratricidal wars abroad? Is there much point in multiplying by a million the powers already conferred by science if the use we make of those we already have are sufficient to endanger the future of civilisation?

… What is the evil genius that perverts even the fulfilment of our sanest hopes and labours, and makes progress more like a nightmare climb among slippery slopes of ever-increasing steepness, than the mass march of humanity along a broad high road, made straight and smooth by increasing knowledge, order and law? Is it idle to aspire to a more dangerously exalted civilisation until something of the definiteness and certainty of the economics of a fuel-engine can be extended to the economy of men. So that the crying need becomes not for ever and ever greater accessions of physical power, but for the knowledge how to secure the fruits of what we already possess. The strong still plunder the weak, nations and individuals alike, whereas there is that in the growth of knowledge which would make the whole world kin. But that cannot come about until we understand what is wrong, nor whilst we attribute to an economic system mysterious powers which a physicist would laugh at.

Soddy was called a “monetary crank” for describing endogenous money. Soddy (1934, p. 62-3):

Genuine and Fictitious Loans.—For a loan, if it is a genuine loan, does not make a deposit, because what the borrower gets the lender gives up, and there is no increase in the quantity of money, but only an alteration in the identity of the individual owners of it. But if the lender gives up nothing at all what the borrower receives is a new issue of money and the quantity is proportionately increased. So elaborately has the real nature of this ridiculous proceeding been surrounded with confusion by some of the cleverest and most skilful advocates the world has ever known, that it is still something of a mystery to ordinary people, who hold their heads and confess they are “unable to understand finance.” It is not intended that they should.

Soddy and Debt-Deflation: Give some Kudos Please

Soddy (1926) proposed abolishing private bank money creation. Irving Fisher came a decade latter (Irving Fisher, 100% Money, The Adelphi Company, New York, 1935) but forgot to say where in might have read it elsewhere. Quoting now from Soddy (1926, pp. 157-8):

It is easy in criticising the monetary system to give a false impression of what it really was. Though by the creation of money and the inflation of the currency by bank credit the community as a whole are robbed of the wealth equivalent to the new creation, it must not be supposed that the banks ever had or claimed any legal title to the ownership of the money so created. They got the permanent use of it and the ownership of the interest it was issued for. The industries to which the money was lent got from the community for nothing–at the expense of the general purchasing power of money–the wealth they purchased with the new money, but had to restore it when the loan was repaid and the credit cancelled. In practice if was never more than temporarily cancelled; it was renewed to other borrowers on the first opportunity.

Soddy (1926, p. 158) then describes a “debt-deflation” process which Fisher (‘The Debt-Deflation Theory of Great Depressions’, Econometrica, vol. 1, 1933, pp. 337-57) was to claim as his own idea:

The banks traded on a monetary capital they created themselves, but made no pretensions to possessing. If they were wound up and their businesses discontinued all of the excess of their liabilities over their assets would have to be made good by those to whom they have lent money. The quantity of money would be reduced then to, say, one-sixth of the present amount or less. Prices, “in the end,” would be reduced to one-sixth unless a corresponding quantity of genuine national money were issued to take the place of the fictitious money destroyed, though, as Mr. Keynes has sagely observed in a similar connection, “in the end we are all dead.” If this were not done, the last loan to be recalled would have to be paid in money worth six times that at which it was issued, and the average for the whole amount of the loans would be over twice their initial purchasing power. This is a somewhat vital distinction between real money and the phantom money being described. With the repayment of a genuine loan the quantity of money is not affected. With the repayment of fictitious loans there is so much less money in existence, so that repayment becomes increasingly difficult as it is enforced. If issued in boom and cancelled in slump they are repaid in units of money worth more than when borrowed.

Soddy (1926, p. 174-5) informs on ‘the evils of a shortage of currency [i.e. money including that issued by banks]’ in the context of price-deflation that this is because “In general all debts would have appreciated in real amount, as money prices fell. The dead hand of the past would have been heavy on the land.” He then goes on to lay out the argument in more detail starting first by noting what economists would later call “sticky prices”:

PRODUCTION REDUCED RATHER THAN PRICES. But the really vital evils of a currency scarcity are due to its reducing production rather than prices. The quantity theory of money [in footnote: For an exposition of the quantity theory of money see Irving Fisher The Purchasing Power of Money] works beautifully one way. Increasing the quantity of money temporarily increases, but makes no very lasting difference to, the aggregate virtual wealth, and prices very quickly rise in proportion to the increase… But decreasing the quantity of money is apt to decrease virtual wealth in proportion much more permanently, leaving prices unchanged and production reduced through the ruin of those engaged in enterprise.

… Whereas an excess of money is an inducement to sale, a deficit is a fatal barrier. To the vendors, whose business if is to sell wealth for money, money is the primary consideration. To the buyer and consumer wealth is. The consumer is exposed to increased competition with others, due to an increase of the quantity of money, and is powerless to resist a rise in prices. But no one in his senses, who has produced wealth for sale or caused it to be produced, and has, over a period of past rime, incurred the charges involved in production, is going willingly to sell it at a loss to suit the quantity theory of money. If his competitors essayed to do so, they could hardly compete long. The result is that less goods are bought with the less money at the same price, not that the same goods are bought at a reduced price. Or, in the case under consideration, that the opportunity to increase production by new inventions remains for long unexploited, and, with increasing powers of production, the production of wealth, as in this country now, stagnates.

Observe the explicit reference to Fisher and an argument that his theory only works one way. The argument in the above quote was that even with a fall in the quantity of money (i.e. money destruction) that prices may not fall and instead the economy suffers a contraction due to a decline in output (or stagnates). Soddy (1926, p. 175-6) acknowledges that for a period of rising prices “the quantitative theory is a rough guide to the facts” but that for a period of deflation “it would work if it did not have the unfortunate consequence of ruining those committed to enterprise–labour and capital alike–and, in the end, in Mr. Keynes’ sense of the word, “after we are all dead,” no doubt must work.” In plainer language: it won’t work.

Here is the opening quote to Fisher’s (1933) now famous article on debt-deflation:

In Booms and Depressions [1932], I have developed, theoretically and statistically, what may be called a debt-deflation of great depressions. In the preface, I stated that the results “seem largely new,” I spoke thus cautiously because my unfamiliarity with the vast literature on the subject. Since the book was published its special conclusions have been widely accepted and, so far as I know, no one has yet found them anticipated by previous writers, though several, including myself, have zealously sought to find such anticipations. Two of the best-read authorities in this field assure me that these conclusions are, in the words of one of them, “both new and important.”

Smell a rat? There is an unusual degree of professing originality; first, admitting unfamiliarity with the literature and then proclaiming finding nothing in spite of zealous searching. The Nobel Laureate calling economists dismal scientists was perhaps not on his reading list. Was it just another coincidence that Fisher’s (1935) proposal for monetary reform was also a carbon-copy of that put forward by Soddy (1926, 1934)? This is the gist of Fisher’s (1933, p. 40-1, 44) debt-deflation:

I venture the opinion… that, in the great booms and depressions… [the two dominant causative factors are] over-indebtedness to begin with and deflation following soon after.

… The two diseases act and react on each other … deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owned. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe [Emphasis in original].

I cannot see endogenous money anywhere in his version of debt-deflation. Soddy (1926, p. 174-5) told us that the problem with price-deflation is that “In general all debts would have appreciated in real amount, as money prices fell.” Soddy (1926, p. 158) already clarified in an earlier passage that with a reduction in the quantity of money by one-sixth and supposing any equal fall in prices (specifying an interrelation) that a debtor’s debts “would have to be paid in money worth six times that at which it was issued” and that with “so much less money in existence… repayment becomes increasingly difficult as it is enforced.” Fisher’s (1933) “debt-deflation” was inferior actually defective when compared to Soddy (1926) as he: (1) omitted bank money and its destruction from the story (vague “dollars” repaid not destroyed); and, (2) in the words of Hyman Minsky “did not explain how overindebtedness developed (‘Financial Instability and the Decline (?) of Banking’, Levy Economics Institute, October 1994, p. 6).“ Here is Soddy (1934, pp. 70-3) on The Credit or Trade Cycle:

1. A period in which the increase of money (through more bank loans on the average being issued than repaid) occurs faster than the Virtual Wealth increases [i.e. the amount of money the community holds thus abstaining from purchasing real wealth] and prices are therefore rising. …

2. Though all other prices are rising, that of gold is arbitrary fixed. This, in itself, means that gold falls in value relatively to goods. …

3. The banker now decreases the quantity of money in existence by not renewing his loans so fast as they are repaid. These loans, contracted in a period of rising prices, have now to be paid back in a period of falling prices so that, through the change in the purchasing power of money and quite apart from the interest paid for the loan, the goods and services that have to be given up by the borrowers to obtain the money to repay must always on the average be greater than those obtained by them with the money by were lent. Before any considerable proportion of these loans can be paid it becomes impossible to obtain the money, that is to sell goods, except at a ruinous loss to the producers. Hence a number of them are rendered bankrupt. Their collateral is sold by the bank, or, if it will now not fetch the amount to repay the loan, appropriated by them.

Is it understandable to not get Endogenous Money [Keynes]?

JMK got a lot of things right though clarity on banking was not one of them. His two major works were the Treatise of Money (1930) and the General Theory (1936). In the former we got the “bull” and “bear” lingo and the idea that deflation and economic slowdowns can accompany a decline in the velocity of money connected to bearish speculators “hoarding” “cash”. In the latter the idea of “money hoarding” was transformed into a “liquidity preference”. Quoting from Chapter 15:

We can sum up the above in the proposition that in any given state of expectation there is in the minds of the public a certain potentiality towards holding cash beyond what is required by the transactions-motive or the precautionary-motive, which will realise itself in actual cash-holdings in a degree which depends on the terms on which the monetary authority is willing to create cash. It is this potentiality which is summed up in the liquidity function L2. Corresponding to the quantity of money created by the monetary authority, there will, therefore, be cet. par. a determinate rate of interest or, more strictly, a determinate complex of rates of interest for debts of different maturities … If the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degrees of risk, the relationship between the complex of rates of interest and the quantity of money would be direct [Emphasis added].

In the above quote Keynes (1936) is clearly arguing the money supply is determined exogenously by the central bank. He is also framing his arguments around the money-item “cash” (which Krugman tends to do as well) as if the money-item created by private banks is not important. There is debate as to what Keynes meant when he wrote “cash” or “money” with the short story being that such terminological vagueness was unhelpful. Turning now to Chapter 17 of the General Theory:

In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible [Emphasis added].

Again Keynes (1936) is denying endogenous flexibility of the money supply (and, yes there was endogenous money even in commodity-paper monetary systems). From Chapter 18:

Thus we can sometimes regard our ultimate independent variables as consisting of (i) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment. But these again would be capable of being subjected to further analysis, and are not, so to speak, our ultimate atomic independent elements [Emphasis added].

At no point does Keynes (1936) get around to excluding “the quantity of money as determined by the action of the central bank” from one of the “ultimate atomic independent elements”. One can pull quotes from the General Theory or from JMK’s other works, which when looking at the words from a particular angle and adding in a qualifier, might be suggestive that Keynes recognised the endogeneity of the money supply process. Still the overriding message in the economics of Keynes on the subject of money supply determination was the assumption that it was fixed-exogenously by the central bank. Post-Keynesians thus have a mixed view on the General Theory.

While Keynes (1936) rejected the Wicksellian “natural rate” and the neutrality of money, his theory of “the” [long] interest rate invoked the notion of “liquidity preferences” as the main determinant; with the discussion framed problematically in terms of a constant money supply. The belief that monetary authorities could control the money supply sparked a thought bubble in Milton Freidman that did not turn out well (and still imbues the work of his market monetarist followers with errors). One can use the “liquidity preferences” concept in a revised sense to understand portfolio decisions and the term structure of interest rates (e.g. decisions to switch from safer into riskier assets and to go long or short). The concept remains controversial as it gave the impressions: (1) central bankers wield enormous control over the money supply; and, (2) private banks make decisions to part with liquidity rather than to create liquidity. The final word goes to Nicholas Kaldor (1982, The Scourge of Monetarism, Oxford, Oxford University Press, p. 26) who remarked that once Keynes’ assumption of a fixed money supply is dropped: “liquidity preference turns out to have been a bit of a red herring.”

So it is understandable why someone working in the Keynesian tradition might not understand endogenous money. Consider Keynes’ (1936, p. 167) Chapter 13 remarks on something seemingly as uncomplicated as a definition: 

It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt1 for a stated period of time.

[In footnote] 1. Without disturbance to this definition, we can draw the line between “money” and “debts” at whatever point is most convenient for handling a particular problem. For example, we can treat as money any command over general purchasing power which the owner has not parted with for a period in excess of three months, and as debt what cannot be recovered for a longer period than this; or we can substitute for “three months” one month or three days or three hours or any other period; or we can exclude from money whatever is not legal tender on the spot. It is often convenient in practice to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills. As a rule, I shall, as in my Treatise on Money, assume that money is coextensive with bank deposits [Emphasis added].

The definition is very much disturbed to the point that what exactly Keynes may have meant when he wrote the terms “cash” or “money” in any given passage will remain guesstimates.

Is it understandable to not get Endogenous Money [Minsky]?

[M]oney, in truth, is an endogenously determined variable – the supply is responsive to demand and not something mechanically controlled by the Federal Reserve… Banking is not money lending; to lend, a money lender must have money.

– H. Minsky ([1986] Stabilising an Unstable Economy, Yale University Press, 2008 pp. 252-6)

The money flows are first from depositors to banks and from banks to firms: then, at some later dates, from firms to banks and from banks to their depositors [Emphasis added].

– H. Minsky (‘The Financial Instability Hypothesis’, Working Paper No. 74, Levy Economics Institute, Annandale-on-Hudson, NY, 1992, p. 2)

One can find quotes in Minsky’s work where he recognises the endogeneity of the money supply and even book chapters on the subject; however, it is a stretch to infer that endogenous money was a central concern of Minsky’s research or played a lynchpin role in his Financial Instability Hypothesis (FIH) (e.g. Minsky; 1975; 1986; 1992) the “core” aspects of which were developed back in the 1950s without any deliberations on the endogeneity of the money supply. It is worth quoting Marc Lavoie and Mario Seccareccia (‘Minsky’s financial fragility hypothesis: A missing macroeconomic link?’, 2001, p. 78)  at length on this issue:

While there is no doubt that Minsky has made major contributions to a monetary theory of production, there remain some obvious problems with his analysis, problems which have not often been fully recognised by those who subscribe to his analytics… [Notably, in Minsky’s 1954 doctoral dissertation and 1957 paper,] the formal macroeconomic model, which leads Minsky to conclude that economic expansions lead to higher debt and leverage ratios for business firms is, in fact, based on a loanable funds approach that stands largely in contrast to the Keynesian principal of effective demand… Minsky’s reliance on a loanable funds approach is clearly spelled out when he claims that ‘the excess of ex ante saving over induced investment will be utilised to reduce bank debt’ (Minsky, 1982, p. 243). In the Kalecki-Keynes framework, any excess of savings over investment will lead to unsold production – the profit realisation problem – and hence to increases in debt for producers. The excess savings will be lent by the banks to businesses to make up for their losses. Unfortunately, Minsky says the opposite. He claims that excess savings will help to reduce debt! This is why in recessions debt ratios should fall, unless there is a price deflation. In this regard, it could be argued that his 1957 model belongs much more to what Schumpeter (1954, p. 276) had described as the orthodox tradition of real analysis, and not to that of monetary analysis proper… Indeed, even as late as his 1975 book on Keynes, the only formal equations, which can be found on page 135, still incorporate the basic elements of a loanable funds approach [Emphasis added].

None of this is to deny the ‘real-world’ relevance of Minsky’s contributions to Post Keynesian theory; notably, that capital economies are prone to periodic endogenous financial instability. The point remains that endogenous money was not critical to Minsky’s FIH. As a final case I will quote from a 1992 Levy Economics Institute paper entitled ‘The Financial Instability Hypothesis’. On page two Minsky writes “The financial instability hypothesis also draws upon the credit view of money and finance by Joseph Schumpeter (1934, Ch.3)” which suggests that he also give much credence to the ‘Austrian School’ emphasis on the role of private banks as creators of net/new “purchasing power”. The word “money” appears 26 times in the paper (including five times in a quote from Keynes) though the phrases “endogenous money” and “purchasing power” are both absent. When Minsky (1992, pp. 2-3) starts to discuss money he provides a long quote Keynes (1972, p. 151):

A considerable part of this financing [of entrepreneurial activity] takes place through the banking system, which interposes its guarantee between its depositors who lend it money, and its borrowing customers to whom it loans money wherewith to finance the purchase of real assets [Emphasis added].

The italicised section gives the impression that Keynes thinks banks are mere intermediaries that borrow money from depositors in order to lend to customers. Not only does Minsky (1992, p. 3) raise no objections to Keynes’ mistake he goes on to write in a passage quoted above but certainly worth reiterating: “The money flows are first from depositors to banks and from banks to firms: then, at some later dates, from firms to banks and from banks to their depositors.” There are no further clarifications or retractions forthcoming on this issue in Minsky’s (1992) albeit condensed version of the FIH. Point to take: as Keynes and Minsky were not exemplary adherents of the endogenous money approach then perhaps everyone should be a little gentler with those who are old to economics but new to understanding it. It may be understandable to misunderstand endogenous money; though as to whether it is acceptable, I would say that it is unfortunate and unhelpful to not.


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84 Responses

  1. stone says

    I guess interest bearing debt based money is so powerful because it has an inbuilt form of “taxation” in the form of the repayment demands. State created tax token money (such as tally sticks, hut tax tokens or hoped for future versions of them) has a value that is entirely dependent on the capability of the state to collect taxes. Bank money has the perhaps more robust underpinning that it must be used to pay off the debt that it is based on. Because of its exponential nature, everyone knows that there can never be enough because the more there is the more is needed for paying interest. Perhaps it is the very “evil” of the miracle of compound interest that gives “usury money” its trusted value?

  2. REN says

    Think instead about the unit and its attributes. The usury especially adds a negative attribute. It matters not that it is spent by private bankers or public authorities…what matters is how the unit behaves after it takes flight. In general, private bankers do things in private, and by extension are not interested in the public well being.

    Even recently, England threatened Iceland with terrorist status if they didn’t pay back their “private bank” loans. Clearly England has been captured by London, as all usury credit banker’s pursue as a goal. Bankers tried to grab Spain’s public commons and turn them into perpetual tolls.

    In the 1600’s there were municipal banks in Amsterdam, Barcelona, Genoa, Hamburg, and they operated interest free. The Church and civil authorities kept close watch over the private banks. In Spain Charles V had squandered the ransom of the new world. Fantastic sums were spent on interest payments. Spanish Loans from 1520 to 1556: In the first year 413 ducats were borrowed, and in the last almost 2M. External debts rose to 37M, 2M more than the total gold/silver reaching Spain. So, Spain’s problems were getting themselves on the usury debt hook. Let’s also not forget about all the misery wrought by England raiding Spanish Galleons on the high seas, and as well all of the Indians worked to death in the new world. This is why I would forbid government from making money, they can only tax it from the people. I would also make money usury free. Much of the Gold from the new world, ended up in the hands of usury banks in England, hence their enforcement of the Gold standard for international trade.

    With regards to higher standard of living, the people who lived in the upper middle ages in England had as many as 160 days of vacation per year. Winchester Cathedral is like a moon shot, and it was built mostly with volunteer labor. It was double entry banking usurers out of Amsterdam (the private banking goldmen) primarily that funded the overthrow of England, and the injection of the Orange Kings via Cromwell. This ultimately led to the Bank of England in 1694, a private debt spreading usury bank that was the first to put a country in debt. It was shortly thereafter, that the Colonies were attacked, leading directly to the revolutionary war. Franklin talks about how the colonies had to abandon colonial script, and the unemployment rate went from zero to 30 percent in just a couple of years. With respect to today, we just put the industrial revolution into hyperdrive. So where is the wealth dividend? Everybody is working harder to pay debts. Standard of living with respect to what? What it could be is not considered.

    Also in the upper middle ages, during the Hanseatic league they circulated poor gold coins at their fiat stamped value. We see the wealth of that period in the paintings and art and general well being of the population. Much of the Gold they used was liberated after the fourth crusades and the sacking of Constantiople…this allowed a floating supply without the liability attachments I refer to. During this period they wore good wollen clothing, had meat every day, and paid their houses off in 7 years typically. Remember, paying 3X for house, where all the banker does is type on keyboard, is a crime of the highest rank. Usury during the upper middle ages was a crime on the order of murder.

    It was Venetians propelled with their new usury mechanisms via the double entry ledger that changed how the Catholic church viewed usury. Crooked Popes got themselves in debt, and hence started charging indulgences. This ultimately lead to the protestant reformation. So, the debt spreading double entry ledger is responsible for much of mankind’s misery. Prior to that usury on the floating money supply caused much additional misery. Virtually every war is due to the usury debt mechanism.

    • BF says

      “In the 1600′s there were municipal banks in Amsterdam, Barcelona, Genoa, Hamburg, and they operated interest free.”

      Sorry but your history is incorrect. The Bank of Amsterdam was famed as a deposit bank. It did not issue notes but did extend credit in secret (to the City of Amsterdam and Dutch East India Company). The Italian merchant banks got round the usury prohibition through financial engineering (calling what they did a foreign exchange transaction rather than a loan).

      “Much of the Gold from the new world, ended up in the hands of usury banks in England, hence their enforcement of the Gold standard for international trade.”

      Incorrect again (to explain why would take more time than I can give).

      “Everybody is working harder to pay debts. Standard of living with respect to what?”

      How about length of life and better healthcare? There’s also billions more humans around too today since those treasured middle-upper ages.

      Respectfully, Ren, I’m going to call this debate done. The history of the world economic system has involved borrowing: that is entrenched as part of the culture. My objections are when excessive debts are not written-off and the fools who extended them are not punished. And, further, when misguided economists worry about the government going bankrupt as if money (abstract symbol for real wealth) could not be created given the political will. You don’t like that, fine, but please save me from all the world’s misery throughout time is due to usury and debt and double entry ledger accounting. I’ve read your arguments and I think otherwise.

      • BF says

        I should clarify that by “please save me” I meant that I think you are overstating the case and that I believe the forces impelling the world in history and today are more complex (though money governance is certainly an important one).

        On a philosophical note, some of the overindebtedness we see today is surely a product of culture; the post-World War II theorised developmental apex of mass-consumption lifestyles in some parts of the world. It was Stuart Mills who theorised on the concept of relative poverty when he wrote “Men do not desire merely to be rich, but to be richer than other men.” Change to some persons and that would seem apt to modern times. American advertising as elsewhere is orientated to creating the perception of dissatisfaction, that is, with this XZY product you’ll be cool, safe (or risque), liked, envied, loved especially sexy. Sales and marketing are in the business of blurring needs with wants.

        The merchants of debt play a part in facilitating an global economic system that according to the consensus scientist view is overshooting its biophysical limits and what for purpose… mass-consumption. Consumers with insatiable wants for material goodies and taking our cues from the invisible selfish hand is all we are meant to be. I am saying, even if ever so vaguely, that the problems with economics may be multifaceted.

  3. REN says

    The industrial revolution was funded primarily by people’s savings. British banking would tend to make loans “after” the ship was loaded. In other words, assets that could be grabbed were in place. Germany’s banking system was a huge threat, in that it included industrial policy.

    My point I’ve been trying to drive home to you guys, is that it is the liablility associations with money that matter. Seigniorage money can be considered debt if you wave your hands and squint. It’s liaiblity associations are against the entire productive capacity of a people. And if you really drill down into it, it debases the existing supply by adding extra volume. However, if there is idle capacity (balance sheet recession?) then it helps add needed demand, and there is no inflation. So, NO seigniorage is not Credit in the “grabbing/foreclosure” standard of BM. To say that all money is credit is simply a falsehood that doesn’t pass even marginal examination. Money is really an accounting identity that has associated forces and liabilities attached. You have to put on your x-ray glasses to see it.

    Let’s look at Chinese banks who are in the habit of forgiving debt. That former BM that issued off of the double entry ledger, can now float in the supply without liability. Is it now DEBT MONEY? Yes, it came into being as debt, but now it is something else. It floats in the supply, so producers can use, and usury banker’s no longer can make claims, or grabbings during engineered depressions.

    The same goes for the Bank of Canada circa 1938 to 1974. During this period they had land grants for vets, built waterways and railroads, hospitals; they had free medical care and free college. By 1974 most of the businesses became self financing as they had enough savings. Also, entprepeneurs could borrow from their neighbors as they too had savings. The floating money supply had redounded to the real economy as savings, instead of being drained away to a feudal banking master elite.

    I examine private credit banking and all of its claims and find them wanting.

    Here’s an interesting article on the BOJ and their attempt to host their society. The money power is real power, and it should not be hidden and given over to morally bankrupt people who manipulate society from their hidden lairs.


    • BF says

      “The industrial revolution was funded primarily by people’s savings.”

      The plunder of Latin America was important to Europe’s economic revival (though it did little long-term good for Spain as the coinage just sat idly concentrated in the hands of the already-rich). Credit in England came to be increasingly important from the 1600s for industrialisation.

      “Seigniorage money can be considered debt if you wave your hands and squint. It’s liaiblity associations are against the entire productive capacity of a people. And if you really drill down into it, it debases the existing supply by adding extra volume.”

      By the above logic all money creation is a debasement against all people. If money is created by the government for war that will as a general matter do little good to the purchasing power of the community’s money. If money is created to initiate production and thus commerce, then, the virtual wealth issues may maintain the purchasing power of the community’s money amidst a higher quantity of the money stock (plus a higher level of higher output and income plus increased living standards).

  4. stone says

    BF, I didn’t mean to suggest that venture capital came from bank lending and I realize that you have previously said that bank lending CAN be counterproductive by causing housing bubbles. My point is to ask whether bank lending ever is anything but counter-productive. It looks to me to be inherently suited for funding the purchase of pre-existing foreclose-able assets and inherently unsuited for financing creation of new technologies and such like. If you know of good examples where debt financing has led to the creation of new technologies or such like then I would love to know. Quasi-bank lending by state banks that have a political rather than a financial motivation doesn’t count IMO.

  5. REN says

    Dr. Hudson and others have done good work on the origins of money. Small tribal groups would just remember their debts and credits to each other. If they had a form of money it would be a tally that said you owe me x goods on this day. The natural inputs of the sun and growing of nature allowed any usury in this case to be paid.

    Money as we know it originated in the temples of the middle east, and the temple priests controlled its issue with uneven weights and measures; this to allow society to not degrade into the haves and have not’s. The money power got away from them though, especially with the advent of usury.

    In biblical terms you are only allowed to charge usury to your enemy, and this mechanism is used as part of full spectrum warfare in order to destroy.
    It is absolutely untrue that all money comes into existence by debt, and the double entry system is a relatively modern invention. Egypt ran its economy thousands of years on a grain standard. Small clay shards would be a token of how much grain was in storage. The grain would be eaten by mice and hence the money unit would degrade. This forced Egyptians to spend their tokens.

    Seigniorage is spending money debt free into the economy. It debases the existing supply by adding to it, effectively stealing a little wealth. However, the benefits are “if it has no debt or other liability associations” it can spin forever mediating transactions. Once it is in the supply, it is beneficial providing not too much more is added. Greenbacks were seigniorage money and they were never issued in greater amounts than authorized. Mass bills during Colonial period were seigniorage money. Continentals are another, but they were debased by British counterfeiting. Others: Federer money in Germany circa 1934. (Federer money, MEFO bills, and Germany reneging on exponential foreign debts, are reasons why Germany went from being broken in 1932, to being the richest country in Europe by 1939.) South African natives were compelled to work with a head tax. Pay the head tax or go to jail, and that was enough force to get the “money unit” moving. Yes, our coins today are seigniorage, and that is the main impetus behind the “Platinum Coin” you guys are so busy promoting.

    The Platinum coin is debt free seigniorage, and then it is traded out for bonds held at the FED. This effectively releases any debts, as the old bonds can be torn up. Alternatively, the platinum coin can go into a spending account, and government can then spend as seigniorage. Of course we know that the FED rebates, so bond debt roll-over is not that onerous. In effect, releasing liabilities through debt forgiveness, or by issuing debt free (no liabilities) allows this money to enter into the supply, where it then goes on to disappear into the ledger, mitigating private debt.

    I’m detecting cognitive dissonance, MMR’s advocate for seigniorage on one hand, and debt money systems on the other. Having the government take on new debt to spend into the economy allows the imbalanced equation P= P + Usury to be satisfied for a time. The usury then funnels to the upper tier, the financial economy, where it then directs society. Sector equations show this effect, where “savings” are government debt. Sector equations are poor on debt instruments and don’t show the money path.

    So, spreading debt systems puts labor into debt peonage, and commoditizes human output to be traded in markets. Does that make humans sovereigns, or does that make them slaves?

    MMR folks also completely understand balance sheet recessions. Banks hypothecate debtors and add their house or other assets to the ledger. Counterparties like AIG insurance jump on the game to make the ledger look better. The new flood of created BM enters the market, pushing up Assets, in turn making the capital position of the bank look better. But, it is all false signaling because of BM predatory gamesmanship. The real wealth producers have their output stolen through a hidden hand. Markets are not perfect predictors of price/value because the money unit is unstable BM. (I use the term BM on purpose as a scatological reference.)

    Private debts/GDP ratio goes up, and effectively the creditor banker is draining the supply toward himself. He has put the population onto a debt hook and everybody is hoodwinked. And if you cannot pay, then foreclosure is around the corner.

    • BF says

      “Dr. Hudson and others have done good work on the origins of money… It is absolutely untrue that all money comes into existence by debt, and the double entry system is a relatively modern invention.”

      Monetary gold is by international accounting standards a monetary asset without a corresponding monetary liability; clearly, not all money comes into existence via debt even today.

      I am aware of Hudson’s work (e.g. Debt and Economic Renewal in the Ancient Near East, 2002). His research on Mesopotamian temples revealed a connection between debt and the origin of money; specifically, as an accounting tool. The Sumerians were the first to develop writing and did so to record trade and presumably borrowing by merchants/ farmers/ fisherpersons; hence, writing, money and accounting all linked at least in that particular society during a particular time period.

      There are more themes than meta-narratives on the origins and evolution of money as it is occurred through the entire history of the world and its many civilisations. History is highly-contextual so any efforts to generalise are demanding. Some communities in antiquity had a monetary cattle standard though that it is no longer with us whereas the theme linking of money to accounting and to the recording of debts stands out. With debts referring here to those who borrowed money but were not money-issuers and to the money-issuers, who by issuing money, were borrowers.

      The Ancient Oriental System (e.g. Egypt, Assyria and Sumeria) were not immune to evolution; indeed, agricultural commodities (including silver) by weight served as a primitive form of money. But let us suppose that ancient Egypt was always on a grain-system using small clay shards, well, what else could the shards be other than Soddy’s virtual wealth? When the Egyptian money-issuers issued a virtual wealth token they were in some respects issuing a liability, that is, a promise to emit real wealth at a later date to the holders of the virtual wealth. To who is the liability owed? It is owed to society in collective. Modern accountants define debt as an interest-bearing liability. It is still correct to think of those Egyptian shards as a liability/debt owed to the community with ‘debt’ understood in the plain language usage as something owed. (It is for those reasons that Soddy inverted the debtor and creditor signs to identify money-issuer as debtors in real wealth terms).

      Nor would I take such an exalted view of “the temple priests controlled its issue with uneven weights and measures; this to allow society to not degrade into the haves and have not’s.” Temple priests were human; some acting more in society’s interests and others less so; the call for ‘jubilee’ stands as a testament to the imbalances of the day as well as efforts to correct those imbalances.

      On usury, the Sumerians did not prohibit lending with interest, the shekel was at least from a certain period in time a wheat-currency which made it easy for farmers to repay (for to borrow in wheat that can be multiplied by the fecundity of nature whereas metal is sterile). Even the Scholastics did not forbid all forms of usury so read up on that one.

      “I’m detecting cognitive dissonance, MMR’s advocate for seigniorage on one hand, and debt money systems on the other.”

      The world is not black and white but grey. I detect cognitive fuzziness on nonbank credit and the consequences of power concentration (that can trouble any monetary system be it dominated by a public body or by private interests). The idea that collective debt problems would be solved by severing the links between money issuance and debt is something I cannot subscribe to. By all means mint PDC and cancel unpayable debts, still, a reform that would make all money 100% issued by the public sector is no panacea and would come with upsides and downsides One could view the PDC as a pragmatic means to address balance.

      The Western World had a centralised public money system for millennium ruled by the offices of Pontifex Maximus in Rome (and the Basileus in Byzantine): relatively little to commend there. I take from Soddy and Aristotle before him that money powers can be harnessed by a public body for the collective good. I also understand and give some credence to Schumpeter’s idea of creative destruction as a force for the collective good: bankers can play a constructive role in the financing of entrepreneurial activity (BTW: the invention of banking in the form of bookkeeping credit in the 1200s and the Renaissance were not entirely incidental though abuses occurred then as today). The Desert Religions have had a lot of influence on money and society; and, for me questions about public versus private are about the ‘middle way’ (i.e. something about balance).

      • stone says

        BF, when you say, “bankers can play a constructive role in the financing of entrepreneurial activity” I think that is the crux of it all. Is interest bearing money a parasite that thwarts constructive human endeavour or does it facilitate constructive human endeavour? From what I can see, I’m very dubious about the merits of bank lending. Isn’t it true that 80% of bank lending is for purchase of pre-existing housing stock? Established companies seem to finance investment by using retained earnings and new technologies seem to get developed despite lack of support from debt lending.

        Is this link true to life?:

        “investors had comparatively little to do with the growth and success of the computing industry (and in general this is true. Bhide has found that only 1/4 of the Inc 500 companies were venture capital funded). If you look at the PC revolution (which was when the real falls in price and growth in reach of computers took place), the drivers were geek tinkerers and hobbyists who all wanted to create a new Hewlett Packard. HP was founded in 1939 and it grew into a dominant Silicon Valley player in the 1950s and 1960s, when top Federal marginal income tax rates were over 90% in the later 1950 and over 70% in the 1960s. Silicon Valley came into being thanks to the work of engineers who clearly were not motivated by dreams of becoming Filthy Rich, since it was pretty much impossible back then. If you look at the iconic companies of the 1980s tech revolution, few had venture capital or wealthy individuals as backers. Apple funded itself off of purchase orders. Software firms like Microsoft and Oracle didn’t need meaningful seed money. Cisco didn’t take VC until shortly before its IPO so as to get a better multiple.”

        • BF says

          Stone, bankers can play is not the same as do play; I wrote this earlier:

          BF February 21, 2013 at 2:55 pm: “I do not object to banks making loans and creating deposits with exceptions for things such as when too much goes into a housing bubble.”

          BF February 20, 2013 at 11:28 pm: “You are correct [Mike] that the US economy along with others have become ‘housing/mortgage-based economies’, that is, over-burdened debt pyramids (including quasi-debt derivatives) surrounding non-fecund real estate. Even the proportion of mortgage finance which goes into new housing is still money lent and spent on non-productive capital assets (I consider residential investment as quasi-consumption because beyond the construction it does [not] employ or yield an income other then rent say relative to a factory). There is also a proportion of mortgage finance ‘locked up in the buying and selling of existing structures’ that just goes to maintaining or inflating prices which is what it is… Big hard issues; need to get cash flows going in real estate to lift the economy, but housing will always be a faulty rudder compared to debt-financing for proper capital assets.”

          BTW venture capital is not necessarily bank debt (and I know not if VC funds raise their own funding through equity or bank loans or nonbank loans). Without knowing the details of the rise of IT in the USA I’d suggest your link is about the start-up (conceptual stage plus small-scale market share ) rather than rolling out production of XYZ product on a substantial scale (which would require some external financing). Obviously, software has little material inputs, while hardware does (and to get revenue from sales you’ve got to develop the means to produce your product – a factory operated by workers is typically needed – and that cannot be afforded on the basis of revenues not yet earned).

  6. stone says

    Ren, when you say, “how did we get here?”,

    – I think that a financial system built by the financial system will direct resources towards expanding the financial overhead borne by the real economy. Basically we got here because our current system maximizes the financial overhead borne by the real economy.

  7. REN says

    Endogenous money is a child of the double entry ledger. A debtor is hypothecated for his credit, and the bank creates its money. This bank money (BM) is then spent into the money supply, where it is used to mediate transactions. For the time interval that it spins in the money supply, others are able to use it. It cannot jump from transaction to transaction forever, because it is under compulsion to return to the ledger and disappear.

    Because BM comes into being with debt associations, and because it is under compulsion to disappear, it cannot by definition, serve properly as money. Labor and wealth producers simply need a ticket that matches goods and services volume, so they can trade their output. Wealth producers need and want a money medium that is low cost and is not saddled with compulsions/liabilities and other hidden attributes. A money ticket that spins in the supply without debt, and without usury, and without wanting to disappear is the ideal. Since money is used by everybody in the supply, it is a public good. Private bank creation of bank money cannot by definition, be a public good. Hypothecation of real estate and narrow asset classes to create BM, so everybody can use the “medium” cannot be defended on any level of logic.

    If one stops and really thinks about the unit itself, money, and its compulsions to move, or to store as wealth, or to be transferred into subordinate debt instruments, then one is must ask …how did we get here. People though Soddy was a crank, and I’m sure I come across as one too, especially when what I say is completely off of most people’s cognitive map.

    We got here because of the double entry ledger and the fictions it represents. A loan in Midland Texas may become a deposit in Lexington Ky. All of the elaborate reserve and settling mechanisms for balancing the books across time and space are simply a way of the banking system to recall its credit.

    Having the central “state” authorize BM as legal tender was yet another leap to enshrine double entry hypothecation, and debt spreading as the money supply means. History shows us that simple seigniorage money, spent into circulation, can be used by people. The tally stick system, started by Henry, lasted almost 800 years until it was undermined by debt spreading mechanisms out of Holland, ultimately leading to the Bank of England in 1694.

    Our current system is an unbalanced equation, also not defensible by any sense of logic. All three sectors: household, government, and business must borrow BM into existence. But, all three sectors must pay back to the banking system principle plus interest. Interest represents leakage drain, making the money supply doubly bad, disappearing BM and a natural usury drain bias. The usury then goes on to manipulate society as I mentioned previously.

    Modern Monetary Realism is wrestling with the notion that government is the only one of the three sectors that can borrow money into existence (new TBills) and then roll over and ignore the debt. This means that government base money has liability associations removed and hence is allowed to spin in the supply and not drain. So, even in a BM Alice in Wonderland world, at some point we must get down to reality allowing some real money to be issued. What was BM issued in trade for a TBill, becomes money through legal means (rolling over debt). China does the same thing by forgiving loans through its State Banks, so their debt becomes floating money and rolls over on a different level.

    The other two sectors, housing and business must go into foreclosure to allow their BM liability to be released. Depressions and subsequent (formerly hypothecated) asset grabbing are the means for allowing the debt contract to expire.

    • Geoff says


      “Endogenous money is a child of the double entry ledger”

      I would say almost all money is, and has always been, a double entry situation.

      “Because BM comes into being with debt associations, and because it is under compulsion to disappear, it cannot by definition, serve properly as money.”

      It served pretty well for the first 10,000 years.

      “Hypothecation of real estate and narrow asset classes to create BM, so everybody can use the “medium” cannot be defended on any level of logic”

      Agreed that the “Real Estate Monetary Standard” isn’t ideal.

      “The tally stick system, started by Henry, lasted almost 800 years until it was undermined by debt spreading mechanisms out of Holland, ultimately leading to the Bank of England in 1694.”

      The tally stick system was a double entry system, wasn’t it?

      “The usury then goes on to manipulate society as I mentioned previously”

      I don’t want to defend usury, but I would say that people for the most part borrow money voluntarily. If they prefer, they can obtain money the old fashioned way. They can earn it.

      “So, even in a BM Alice in Wonderland world, at some point we must get down to reality allowing some real money to be issued.”

      So money created by a bank is fake?

      • REN says

        Money divides down at the moment of transaction and stands in as a good. It’s ability to make this division is the key accounting reason money is used to stand in as goods. When money is not standing in as a good, it is latent demand. Banker’s have interjected themselves in between the Credit and Debt transaction by creating their own money. Banker money also can spin in the supply and mediate transactions. It also can stand in as a good. But, it is a doppleganger, a lower form money that has credit liability associations, usury and it wants to disappear. The banker really never owned the credit to begin with, he stole it from the debtor at the moment of hypothecation.

        Consider, a house loan of 100K takes 300K to pay off with usury over 30 years. Was the banker really loaning out money and foregoing his use of it in the now? NO, he was creating BM from nothing and putting the debtor on the hook. During that 30 year period a portion of the BM is circulating and disappearing.

        It is a tragic absurdity that we use money of this type to trade our output.

        • stone says

          Ren, Steve Randy Waldman’s post “what is a bank loan” said that the service that the bank is providing is that of a guarantor between the borrower and those accepting payment from the borrower.
          Personally, like you, I’m extremely doubtful that our current system is a good one.

        • Geoff says

          Ren, I’m watching the red carpet and typing simultaneously. I blame any typos on Jennifer Hudson’s dress, which is…distracting 😉

          Thanks for your reply. Very good point about bankers not “foregoing” consumption when they lend given that they create money out of thin air. Your knowledge of monetary history is clearly outstanding, and I don’t disagree that banks leave something to be desired, but it’s the system we have. Besides, there could be worse ways to allocate money, a govt system probably being one of them.

      • stone says

        Geoff, I thought that the tally stick system of money in medieval England was more like tax token money. The retained half of the stick was simply a record of what money had been issued and so what needed to be recalled as taxation. Some US states issued sales tax tokens and colonial authorities also issued hut tax tokens in Africa. There was no interest to pay on the tally sticks. I guess current coin issuance by the US treasury is like that too?

  8. stone says

    Ren, you say that the consumer price index could be used as the measure of whether more money needed to be injected in. My worry is that that overlooks the reality that most of the dollars spent every day are not spent paying for goods and services but rather are spent exchanging pre-existing assets or derivatives of them. If the government freely injects money in whenever CPI is below target, then the private sector will simply evolve into being a system for gathering those money injections and converting them into asset price inflation to amass wealth and power as unrealized capital gains. To a certain extent we already have that now with government deficits eventually ending up as unrealized capital gains and a consequent requirement for a larger and larger proportion of real resources being occupied conducting “wealth management”.

  9. REN says

    My view is that all new money should be injected into the base of the population C.H. Douglas style. The consumer price index could be a mechanism for determining the relation of money vs goods/services volume. It would require a fourth branch of government, the monetary authority, to issue the money as needed in a macro sense.

    This puts humanity in proper relationship to their government; people own their money power through their agent, the monetary authority. We render unto Caesar our money in accordance with his needs. We give up a portion of our police sovereignty to sheriffs, in the same way our money power is divested to the monetary authority as our agent. By law, like Sheriffs, or agent cannot abuse his power.

    The bounds on money are held to proper relationship as well, as the demurrage tax forces it move, so velocity becomes maximum and money is used for its proper function, as a mode of transacting wealth, not wealth storage.

    The flip side of money power – the fiscal side i.e. taxation, remains with the treasury. Government can still tax and spend, but they merely recycle what they tax from the population. Most people think that is how government works now, and they also think that banks loan out somebody else’s savings.

    Without usury, money cycles in lower loops between the population of savers who credit their fellow citizen debtors. Bankers are simply trusted intermediaries who help mediate transactions between those who need money and those who want to lend. And, creditors will want to lend because their money will “rust” as does all wealth. In our current system, usury cycles wealth to an upper tier of capitalist financial pools, and this capital is used to manipulate and drive our civilization. Worse, it commoditizes and packages humanity into debt instruments to be traded in markets.

    Once the money supply is floating i.e. money has no associated liabilities, it is nearly self correcting as the real economy of producers tends to a normal rate of growth. (We won’t need injections after a point, and we won’t be compelled to compound the money supply to meet the needs of compounding interest.)

    There is the small problem of S shaped seasonal curves normal to an economy, where even demurrage velocity money may not source in volume to meet needs. In that case, perhaps a special kind of credit, denominated in public assets, could be used as a natural regulator, where it comes into being as needed and naturally drains into the ledger as it terminates.

    The Gross Asset tax sounds like a good idea, where it makes assets “rust.” Taxation is also very important, so I’m glad smart people here are thinking about it.

    Kitson describes how surplus wealth, converted to money, gains special privilege. He was British and 16 years older than Soddy. I wonder how much influence he had on Soddy’s ideas?

    • Geoff says

      REN, it sounds like you want to control the money supply, which is quite the opposite of an endogenous system.

  10. stone says

    Ren, I also think that hopes of doing “pumping and draining” “scientifically” are dodgy. Technocratic management of the economy seems to me much less robust than trying to set things up in a way that self corrects without reactive intervention. To me replacing all taxes with a gross asset tax and replacing all welfare payments with a fixed citizens’ dividend might be a way to get a sustainable self correcting sustainable economy that didn’t need any technocratic hand on the rudder.

  11. REN says

    Public banks socialize the gains by redistributing the usury that aggregates in their system. All positive interest systems force the money supply to grow in order to meet mathematical underpinnings i.e. compounding or simple. Of course, money is sterile, and hence supply can only grow by artificial means, usually by spreading new debt. In the case of endogenous bank money, whether public bank created or private bank, the returning money is under motive force to return to double entry ledger, then disappear. The overall money supply is not floating, instead it is compelled to move to re-enter the ledger upon payback of loans. The usury component, not recycled as banking services and payroll, aggregates as capital usury pools. These growing (exponential) pools are seen in the financial economy numbers, which often has little relevance to the real economy.

    Soddy was pissed, as am I, that we don’t have a real floating money supply. By floating, the money comes into existence as seigniorage and is not under liability compulsion to return to a ledger. Private bankers could remove liability compulsion by forgiving debts, and thus the former endogenous money changes form and becomes floating. But, of course they will not do that, as their motive is profit. Public banks can forgive loans, or make grants via an exogenous (seigniorage) mechanism, but then we enter into a fascist Chinese style system.

    Goods and services providers simply need a token that allows them to trade their output.

    I’m glad you folks are investigating the money system, but you may soon find out endogenous money with positive interest is unworkable. The escape valve of depressions and then debt forgiveness via foreclosure leads to oligarchy. Fascist public banks lead us down a different slippery slope, where the natural rights of man are encroached upon by political masters. Positive interest on a floating money supply, such as Chicago plan, will tend to aggregate the usury capital toward the “lender,” usually somebody who has monopolized the gifts of the earth, i.e. minerals/oil etc.

    We really need a floating money supply that is under motive force to only pay taxes. It needs to be zero interest, hence it should have demurrage and also have mechanisms to pump and drain the supply. (Some legitimate credit that can be jubileed could serve as a drain for normal S shaped economy, not to mention the demurrage taxes.) Pumping and draining supply be done scientifically to meet needs of producers, not linked to asset inflation of land or other hypothcation credit schemes for easily foreclosed upon asset classes. Endogenous credit schemes are unfair to the wider community of wealth producers and money users.

    Fisher ignored his antecedent Soddy, and it seems Soddy ignored his, Gesel.

    • BF says

      I do recall a passage somewhere in one of Soddy’s books on the work of Gesel written in a favourable light.

      I am not so sure that endogenous money with a positive rate of interest is necessarily unworkable. It is difficult to grow out of a systemic debt crisis when the monetary system is debt-based; still, even if money is severed from debt there is still debt (e.g. nonbank credit is in some sense ‘moneyless’ credit insofar as the credit extension does not create additional liquidity in the macro system). Washington should have have taken steps to implement a large-scale writedown of the principal on underwater mortgages back in 2009. The stratagem of trying lift housing prices back up amidst an overhang of debt was always inferior to he option of ridding the economy of its debt overhang. Washington should have followed the early 1990s Nordic experience not Japan’s post-1991 debacle.

    • stone says

      Ren I’m still thinking that replacing current taxes with a gross asset tax would sort all of this out. When you say money needs demurrage, I think ALL asset values need EQUAL demurrage and that is what replacing current taxes with a gross asset tax would do. I think having demurrage (or negative interest rates or whatever they get called) limited to money simply is a gift to commodity speculators.

  12. beowulf says

    That’s sort of how credit unions work, no? And that’s why community banks think they should be cast in to the fiery pits of hell.
    “‘We’ll Fight This To The Death’: The Vicious Capitol Hill Battle Between Banks and Credit Unions”

  13. stone says

    Greg, I think that dream would all work out fine for everyone if asset prices were more in line with wages and people were not hoping to live off of rising asset prices. If houses were cheaper then people could pay off the mortgage fast and then start saving for retirement buying cheap stocks that payed high dividends. I really think asset price inflation is what kills that dream.

    • Greg says

      I dont disagree Stone. I never intended to imply I agreed with the idea that rising asset prices were necessarily good. It seems to me though that our current banking model can only survive with rising asset prices OR with rising wages or both (or with periods of huge deflation, followed by govt guaranteeing the solvency of your balance sheet and finished off by buying fire sale assets and renting them back to previous owners)

      • stone says

        Greg, if the banks are owned by the people taking out the loans such that dividends paid by the banks eventually end up being used to pay the interest on the loans then I think everything can be sustainable if debts are not growing (perhaps dividends go into a pension pot). I know that is a big ask though. My impression is that so long as wealth distribution is not becoming concentrated, then things can be sustainable. It is when there is a “creditor class” and a “debtor class” that things go off the rails. I guess the “creditor class” can be institutions rather than actual people??? I think the current problem is that as house prices have ballooned, a massive chunk of peoples earnings has become locked away as repayments of ever greater mortgage debt.

        • Greg says

          Again, I dont disagree Stone. You are pushing for more socialization of the gains.

          Good luck with that. But I agree it could make the model more sustainable.

  14. stone says

    Greg, I guess it all depends on what is meant by going forward. Perhaps defaults, bankruptcies and loan write downs in conjunction with technological and organizational increases in efficiency might be considered going forward. I suppose in principle if such bankruptcies were particular to particular firms then even if solvency depended on exponential expansion the system could still work and not expand faster than the underlying real economy BUT entail a lot of insolvency. I guess in practice things don’t work like that because everything is linked together such that systemic risk causes bankruptcies to occur in waves or (more recently) enables the banking system to demand vast bailouts.

    • Greg says

      True, that was a vague statement. When I say going forward I am referring to an upward trend in growth , upward enough to keep employment levels(private sector) steady and upward enough that as you approach retirement your are no longer servicing debt and your income, which you derive mostly from drawing down savings, can go predominantly to present period consumption. This IS the American dream (or myth maybe), work hard for 30 years with a steadily rising income that allows you to buy your house, pay it off before retiring and then be debt free. I actually think that is attainable, it just cant happen with a private sector money system alone in my view, not in the way it is currently being managed anyway.

  15. Greg says

    Well between this post and JKHs most recent I think this site might have two of the “Required readings” for anyone remotely interested in money/econ topics.

    Thanks to both of you.

    A couple thoughts and they involve some from both the forementioned posts and comments.
    It seems clear to me (but I would be glad to be corrected) that our endogenous money creation system, driven by our profit seeking, spread playing banks can only keep going forward IF two things are true. 1) The borrowers incomes continue to grow, to be able to pay back loans 2) the assets backing loans increase in value continuously. Now, it does seem that simply number 2 can keep it going for quite a while but eventually number 1 needs to catch up.

    Our shadow system has created more and more assets via our derivatives markets to try and continue expanding balance sheets but it will all run dry and the only way to increases asset values will be to try what the BOJ apparently is doing here;

    Our monetarist friends, Sumner and Rowe, will be so happy when our Fed starts targeting not just home prices, but stock prices, MBS prices, CDS spreads …… whatever assets the banking system needs to increase in value to stay solvent.

  16. stone says

    I think the root of the problem is that people find it much more comfortable to discuss the amount of monetary wealth in the economy whilst the actual issue is its distribution.

    • BF says

      Yes excellent point! Money creation is no cure-all and it should not be forgotten that global society is already “rich” in financial terms, well, at least certain enclaves.

      Consider the following statistics published in the ‘2012 World Wealth Report’ on “investable wealth” (that excluding primary residences, collectibles, consumables and consumer durables). In 2011 the so-called ‘high net worth individuals’ (the richest 0.15% of humanity) possessed “investable wealth” equal to $42.0 trillion and that of the 100,000 ‘ultra-high net worth individuals’ (the richest 0.0014% of humanity) equal to $14.9 trillion. To put these figures into context the total gross external debt of emerging and developing countries (i.e. above 80% of humanity) owed to advanced economies was $6.1 trillion in 2011. Such extreme concentrations of wealth have much to do with what Keynes (1936) identified as one of the two outstanding faults of a capitalist economic system (“its arbitrary and inequitable distribution of wealth and incomes”); and, disturbing in a world where children in the tens of thousands die from preventable diseases each day.

      • beowulf says

        Good point and wealth distribution is so much more skewed than income that a flat rate wealth tax would be far more progressive (in terms of distribution of tax burden) than even a progressive rate income tax.

        • stone says

          To me a big advantage of replacing current taxes with a gross asset tax would be that it would ensure that wealth was put to use so as to gain a yield to pay the tax with. Currently we can keep and grow wealth in the form of unrealized capital gains even when doing so is not actually enabling any productive capacity to be transported through time. Just as any untapped potential human labour or machine time is lost forever, I think it is vital that wealth should be productively used to be preserved in a monetary sense.
          I tried to collect together arguments about asset tax etc in something I tried to write :)

  17. Reverend Moon says

    And who doesn’t love the Soddy quote:

    “Money now is the nothing you get for something before you can get anything.”

    (or something like that)

  18. Reverend Moon says

    Great essay Dr. BF
    Its interesting that his proposals to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort have all been adopted despite him being dismissed as a “crank” at the time.

  19. Ashwin says

    Brett – great essay. I think you’re right about Fisher. I don’t know enough to comment on Keynes ( I haven’t read Treatise on Money). But let me take a stab at defending Minsky.

    You’re absolutely correct that the FIH does not depend upon endogenous money. But the FIH to me is a much more general theory which essentially boils down to the dictum that “stability destabilises”. In some sense, this idea is not even restricted to economics. For example, ecologists know it as the resilience-stability tradeoff .

    Having said that, IMO Minsky understood endogenous money and he did so because he got his theory of money/banking from Schumpeter who was an endogenous money theorist. It is also clear to me that even Hayek “got” endogenous money and understood it as the reality of the banking system they lived in (ref ‘Money, Banking and Dynamics: Hayek vs Schumpeter’ by Agnès Festré). The difference between Schumpeter, Hayek and Soddy was that they had differing views on whether this was good/bad and what should be done about it. Hayek and Soddy thought this was a bad thing. Schumpeter thought this was a good thing and in fact that the banker’s ability to create money ex nihilo was the ‘differentia specifica’ of capitalism and that the banker was the ‘capitalist par excellence’. In fact, early Schumpeter’s theory of constant disequilibrium via creative destruction was predicated on the entrepreneur’s ability to access purchasing power ex nihilo via the banking system.

    There’s another reason why Minsky (especially early Minsky) did not emphasise endogenous money – the 20 years post WW2 were the only period that I have managed to dig out in the last few hundred years when simple monetarism was a fair and accurate description of the system. For this perspective, you should read this paper by Axel Leijonhufvud which I cannot recommend highly enough . In the early 50s for example, there was no Fed Funds market, reserves were a binding constraint and the Fed did have “control” of the money supply – Martin Mayer’s book ‘The Fed’ is excellent on this period as well. One of Minsky’s earliest papers concerned the birth of the Fed Funds market and in fact a lot of his work detailed exactly how banks “innovated” their way out of the Fed’s control.

    For anyone who wants to read Soddy, ‘The Role of Money’ is available on Kindle – There are very few books which I have highlighted more on my Kindle.

    • BF says

      Hi Ashwin, I would say that Keynes was not clear on endogenous money; whereas Minsky was not always clear. The passage from Lavoie and Seccareccia is taken from authors whose views I give strong credence to; and, they think Minsky has a case to answer regarding loanable funds vis-a-vis EM analysis. And in that 1992 FIH paper, well, it is clear only that EM is not important.

      I am aware of Schumpeter’s views (highlighting in the post that the Austrian school knows banks create money); with Soddy’s rage against bankers partly explained in the context of the duplicity of bankers, plus his own views on the role money should play. Duplicity was bankers professing that they could not create money ex nihilo while condemning governments as immoral if they sought to do as the bankers did (i.e. the bankers’ view was keep your hands off the money taps we’d prefer to control that for our own profit).

      Soddy (1934, p. 136) on the role of money: “There is now No Shortage of Wealth.—In the new economics there is now no difficulty in creating wealth. Unemployed labour and capital are only waiting to be given orders to proceed to do so. If it were understood once and for all that, when they had done so, the money would be issued by the nation to distribute the product at the same price-level as prevailed when the costs in connection with their production were incurred, nothing else would be necessary to ensure that all the unemployed labour and capital would permanently be put into full productive operation.”

      Soddy desired State-centric money (accent on desired because he knew that was not the world he lived in). I do not object to banks making loans and creating deposits with exceptions for things such as when too much goes into a housing bubble. There is alas an unhealthy blindness perhaps willful by some in economics and politics about what money is. It is one thing to create money and another to give it value, still, the myth that so many fan is to delude the public into believing that policymakers are short of virtual wealth tokens when the abstract symbol for wealth can in fact be created ‘out of thin air’ at will.

      Frederick Soddy, Wealth, Virtual Wealth, and Debt can be read here:

    • Ramanan says

      “there was no Fed Funds market, reserves were a binding constraint and the Fed did have “control” of the money supply – Martin Mayer’s book ‘The Fed’ is excellent on this period as well.”

      Ashwin, it can never control the money stock. Control means making the thing one is supposed to be controlling moves in the desired direction in a predictable way. If the central bank hikes rates to attempt to control the money supply, it may have opposite effects as tumbling bond prices induces the nonfinancial sector to sell bonds to banks who are dealers in the government bond market leading to an increase in the money stock – the opposite of what is desired.

      So the attempt may fail miserably. The experiments in the UK and the US show this.

      Banks’ innovation is a nice part of the story but it is not an explanation itself because it implies the endogeneity is limited by the innovation. Carefully looking at central banks’ behaviour can easily prove endogeneity – whether there is innovation or not.

      • BF says

        Yes, Ramanan, the Fed having “binding control” on the money supply that seems one of those monetarist delusional dreams.

    • Geoff says
  20. stone says

    My pet obsession is that creation of money/debt could become utility seeking rather than parasitic IF all current taxes were replaced by a uniform tax on gross assets. Then “virtual wealth” would be created only in so far as it facilitated creation of real wealth.

  21. JKH says


    Excellent post.

    It’s my impression that some people seem to think that 1971 was the tearing down of the Berlin Wall that held back the flow of endogenous money. I’m not referring to those who don’t understand that we have endogenous money now – rather to those who do understand that, but who characterize pre-1971 as some sort of absence of endogenous money.

    How might 1971 related to Soddy’s observations 90 years ago?

    How should 1971 be interpreted in terms of endogenous money, in your view?

    And would you have any comments on this, from my last post, as it might relate to Soddy’s observations, or otherwise:

    “The monetary system and the financial system are constructions of double entry accounting. It has been this way for a long time. This did not start in 1971. The fact that there was gold serving as a fixed value backstop for certain monetary assets shouldn’t obscure the fact that a monetary system is a fiat construction at its foundation. Gold at one time was a hard constraint on the behavior of the monetary authorities. But the authorities will inevitably create paradigms of operational constraint and guidelines in any monetary system. These restrictions include central bank balance sheet constraints (e.g. gold backing; Treasury overdraft constraints; supply and pricing of bank reserves that are consistent with the monetary policy interest rate target) and other guidelines (such as the reaction function of the policy rate to various measures of inflation, output, or employment). The full category of potential constraints is broad and varied. But none of this alters the fact that a monetary system is basically a bookkeeping device for the intermediation of real economic activity. It is a construct that enables moving beyond a barter economic system that can only be imagined as a counterfactual.”

    • BF says

      “But none of this alters the fact that a monetary system is basically a bookkeeping device for the intermediation of real economic activity. It is a construct that enables moving beyond a barter economic system that can only be imagined as a counterfactual.”

      JKH, how Soddy described ‘Virtual Wealth’ is I believe the counterfactual you describe. Soddy (1934, p. 36):

      “Virtual Wealth.—This aggregate of exchangeable goods and services which the community continuously and permanently goes without (though individual money owners can instantly demand and obtain it from other individuals) the author terms the Virtual Wealth of the community.”

      ‘Money’ gets us beyond barter; however, Soddy thought economists were silly to count ‘money’ (abstract for real wealth) and tangible wealth as ‘wealth’. He also thought it silly that economists thought just because debt can grow at simple or compound interest on the books of the creditor, then, so must real wealth and welfare be growing. Debts (negative non-existing wealth) can multiply to infinity subject to the laws of maths not thermodynamics. Obviously, real wealth rots; and when a debtor cannot repay for whatever reason then bankruptcy is the only fair option (but we do not have international bankruptcy proceedings only IMF exploitation for western creditor nation interests).

      Soddy likened economists understanding of capitalist economies as akin to a vulgar perpetual motion machine where society is somehow meant to live off its own mutual indebtedness (only a few can live off interest). I like to use ‘virtual wealth’ because it exposes the folly of policymakers pleading monetary poverty.

      • JKH says

        “which the community continuously and permanently goes without”

        out of the box thinking

        • BF says

          Certainly, a bit abstract, but I think money be that. James Tobin’s ‘fiduciary issue’ is similar. All individuals within a society cannot simultaneously exchange “money” into real wealth as someone must end up holding the “money”.

          The illusion otherwise “can be maintained unimpaired as long as the society does not actually try to convert all of its paper wealth into goods.” Add in bank deposits and like Soddy. Counting fiat ‘money’ as wealth not as a claim to wealth does seem confused to the mindset of a physicist.

    • BF says

      Hi JKH,

      Thanks. Yes, when Nixon closed the gold window in 1971, some would say that money became for the first time truly fiat.

      The subject can be confused by different understandings of ‘fiat’. If by the term ‘fiat’ one means that it is centralised authorities (not necessarily a nation State) who write the dictionary on what is accepted as money within society, then, money has been fiat for a long time. (And the State can by decree pass over its sovereign right to issue the community’s money to the private sector).

      However, when most economists think of the term ‘fiat money’, they mean a monetary system in which money is irredeemable directly from the money-issuer for real wealth (say a commodity). There were substantial monetary reforms in the US during the 1930s with the relevant one to the discussion the demonetarisation of gold at the domestic level. According to the second definition, then, from that moment on we have at least partial fiat money in a legalistic sense. Indeed, there is a need to invoke a distinction between legal and practice, because while the law may well proclaim something is redeemable on demand from the issuer the issuer may issue more ‘virtual wealth’ money tokens than the underlying real asset held in their possession.

      I cannot recall the exact dates; however, gold was demonetarised at the international level during the turbulent years of the 1930s and 1940s. Eventually, in the US dollar-gold Bretton Woods System of Fixed Exchange Rates, gold again occupied a role as an underlying monetary asset for the international system in a legalistic not practical sense. 1971 was the legal instatement of fiat money at both the domestic and international money. Though for all practicalities money had long been only notionally redeemable from the money-issuer for real wealth (and practically irredeemable); not at the individual level of market exchange, but certainly in aggregate. When the few individuals who desired to redeem the abstract symbol for real wealth (money) into real wealth directly from the money-issuer, became many in number, there was usually insufficient ‘precious metals’ in stock to do so.

      Fiat money and endogenous money are quite apart at the conceptual level. I have read somewhere that it was the Knights of Templar who were the first modern bankers. Christians fighting the crusades or wanting to visit the Holy Land would deposit “money” to one of those Knights where they lived somewhere in Europe, take a piece of paper with them on their journey, and receive “money” from another Knight on arrival at their destination. Perhaps that it is true. Nonetheless, say it was the premises of goldsmiths where people put their gold for safekeeping getting a paper token inscribing on it their right to ownership of X gold, and in time the goldsmiths realised that they possessed more gold than which customers required. The goldsmith could lend out gold coins not of his/her ownership.

      Now, shifting through the evolution of money to a monetary system where there is the circulation of paper monies, notionally redeemable into a metal on demand. I say notionally because those who know their history will know that banks (along with governments) typically printed paper money in considerable excess to the underlying asset in possession (said redeemable).

      In modern day senses endogenous money is about the determination of the money supply process. Consequently, while there are lagged reserve requirements for a tiny portion of transaction deposits in the US, that should confuse the analyst from recognising that private banks lend first creating deposits along the way and look for reserves later (which the central bank provides in order to hit its overnight interest rate target and to preclude a payment system gridlock). In a historical context it may be more appropriate to think of endogenous money as private money created in a way that is relatively independent of the actions of the State. That is, to money issues not in some mechanical proportion either to those issued by State, or to the legal underlying real asset.

      Returning now to the monetary system with paper money issued by banks in excess of the underlying asset, well, those issues can be thought as EM in a historical context. (Possibly, one could think of a miner finding gold as endogenous money insofar as it is by the will of the individual that money is created, but for argument’s sake let us stick with that outlined above).

      In the 1860s the US federal government laid out the charters for National Banks. Such banks could issue paper notes if backed by government bonds. Many banks remained State-Chartered and with the invention of the cheque, it soon mattered little to banks about whether they could issue notes (except during bank runs), only that they could as Soddy observed create money by a pen stroke.

      The invention of writing by the Sumerians coincided with the invention accounting and money or so I have been led to believe. In a historical and modern context, money can be seen as a double-sided balance sheet affair (even when the money has no physical form other than a few scratches to denote that one has borrowed X grams of wheat), so I hope I have answered some of your queries JKH. I think 1971 matters not for Soddy or for endogenous money, that is, private banks enjoyed flexibility to create money before 1971.

      Some time ago I stumbled on S. Zarlenga ‘The Lost Science of Money’ (Valatie, NY: American Monetary Institute, 2002) and have yet to read anything which suggest its historical account is anything but an extraorindary literary effort.

      • JKH says

        “the issuer may issue more ‘virtual wealth’ money tokens than the underlying real asset held in their possession.. Though for all practicalities money had long been only notionally redeemable from the money-issuer for real wealth (and practically irredeemable); not at the individual level of market exchange, but certainly in aggregate. When the few individuals who desired to redeem the abstract symbol for real wealth (money) into real wealth directly from the money-issuer, became many in number, there was usually insufficient ‘precious metals’ in stock to do so.”

        I think this is how I’ve intuitively been interpreting fiat as wider in scope – including the case of a non-real-backed fiat component that becomes a sort of monetary/real multiplier – if you’ll excuse the crudeness of that characterization.

        And in that sense, we’ve always had fiat.

        Here’s a question for you Brett:

        Is there any analogy between today’s “reserves later” reality, and a possible yesteryear “real backing later” transmission in response to INDIVIDUAL bank credit creation?

        I’m scratching my head trying to figure out how endogenous bank money creation could have been operationally constrained or slowed by a relationship to gold rules of whatever kind – other than by after the fact interest rate tightening as a function of a gold squeeze on the monetary authority.

        Maybe we’ve already answered that here in general terms, but I’m interested in more detail on the nature of the transmission mechanism of a macro gold constraint to individual bank endogenous money creation. Somebody must have written about that transmission mechanism.

        If you can answer this authoritatively, I will consider the answer to be a Black Swan of economic thinking.

        • Ramanan says

          In the post WWII period, nations ran their economies using Keynesian principles.
          In addition to monetary policy, fiscal policy was also used during the Bretton Woods era. A stop policy would reduce domestic demand and lead to a tightening of credit. So when inflation tended to increase or when balance of payments started getting out of hand, nations would slow down demand using both fiscal and monetary policy and the 50s and the 60s were the days of the “stop-go” policies in Britain. Devaluation was also possible because a well calculated devaluation improves the trade balance and brings the money in in the expectation of a revaluation sooner or later.

          Of course the system was far from perfect and it all broke down and nations started to freely float their currencies. Unfortunately, the new regime was no panacea to the “balance-of-payments problem”. The Monetarist counter-revolution completely took the focus away from all this because there was high inflation and there was all the debates about controlling the money supply etc.

        • BF says

          Thanks JKH, actually thanks not, for you could not but try to ask more demanding questions I believe.

          My reply will a post (next week): I cannot profess it will be authoritative account and thus at most can only promise a speckled duck.

          At present I can only but tease the subject matter with the working post title “‘Fiat Money’ and ‘Endogenous Money’: Two sides of the same Plutocratic coin?”

        • stone says

          Was endogenous money creation constrained by the gold standard because it eventually brought everything back down to earth through defaults and foreclosures and fire sales of foreclosed real assets? Endogenous money caused everything to bubble up as now but when the bubble eventually popped it went all the way back down to what could be settled in gold and balance sheets were wiped clean.
          I guess if there was no government deficit spending, then the consequently limited stock of risk free financial assets would in principle also eventually constrain the banking system in our non-gold standard system???
          I think in England in the 1800s, the Bank of England used to lend bank reserves (at very high interest) through the discount window in exchange for real assets such as land. That avoided the bank wipe outs that used to happen in the USA at the time (where there was no central bank) but did bring prices firmly back down to earth. Banks would not actually get very much money for the foreclosed land and would have to pay ruinous interest to the Bank of England in order to get that money.
          I think the very fact that debts that could not be paid were not paid might have caused banks to think twice about the loans they made. Furthermore in the early 1800s, shareholders of a bankrupt company could be sent to a debtors prison. That in itself presumably led to caution. The industrial revolution consequently was funded by informal equity financing and bank financing was restricted to funding merchants where there was minimal enterprise risk and so the loans were fairly sure to be repaid on time.
          I’m very unclear on this and just tossing these thoughts into the discussion.

      • stone says

        Your historical account seems to put a lot of emphasis on gold. Isn’t it true that the bulk of the monetary base in medieval England at any rate was in the form of tally sticks (wooden, tax token, money)? The Bank of England was founded using a capital stock of tally sticks. Gold being the monetary base is just something that occasionally crops up in history. Even when precious metals were used, wasn’t silver more typical eg the ancient middle east had a fixed barley to silver exchange rate, Alexander the Great paid his army in silver, Vikings used chopped silver as money and, during the 1500 to 1800 period, Spanish pieces of eight were the global currency used across Asia, the Americas and Europe?

        • BF says

          Have a read of S. Zarlenga ‘The Lost Science of Money’ (Valatie, NY: American Monetary Institute, 2002). I did mention ‘precious metals’ so substitute gold for silver, bronze to your liking. The Gold Standard obviously enshrined a big role for gold which the gold-bugs today dream or is it delude about. I recall gold being important to cultures in antiquity; apparently, it was a commonly found metal in a valley somewhere in the Middle East. Common folk just gave it to the Temple Priests as an offering when they had nothing of value to give (say food) but over time the Priests loaded with ornamental gold decided to make it the monetary medium making themselves rich (or so I have read).

          And let us not forget silver too. The English running a trade deficit for tea at one point in history not so long ago, nearly drained all their silver; and responded by enforcing the sale of opium through war and territorial acquisition. Today that would be like Columbia invading the USA to sell cocaine. One is taught often that the American Revolution was about trade (again tea important) though it was also about the Crown interfering in the monetary affairs of her then colonies (yes mints were prohibited for a while and fiat paper issues also revoked).

          The Shekeh was an interesting money though you can read up on that one. Money has certainly taken different forms at different times; nonetheless, in much of the history of the Western Civilisation ‘precious metals’ have played a major part.

      • Michael Sankowski says

        BF, this comment is a great post all its own. People are using “fiat” as a kluge word for “endogenous”, and they really don’t mean it either way!

        “Consequently, while there are lagged reserve requirements for a tiny portion of transaction deposits in the US, that should confuse the analyst from recognising that private banks lend first creating deposits along the way and look for reserves later (which the central bank provides in order to hit its overnight interest rate target and to preclude a payment system gridlock”

        I am very concerned about the “lend first” clause, because it seems as though it is very important exactly how the underlying real asset is used as the basis for the money creation.

        We spend tons of time here concerned about the “lend first” part of the modern endogenous system. Just getting that part straight seems to be extremely difficult for many people. But that’s not the only errors they are making, people are also making errors in how they think about the lending.

        If we think about what is broken in our system today, it isn’t that we can’t create money. It’s that we don’t have viable assets against which to lend. Even if nobody understood how the process worked before, it did work! Now, today, we’re forced to understand the process a bit better so we can fix it. The part of the process that is broken is on the lending side, but it takes a wider understanding that the lending happens first to make progress on the problem.

        “That is, to money issues not in some mechanical proportion either to those issued by State, or to the legal underlying real asset.” This seems to be much like our modern banking system as well. Banks can lend against real assets with various “haircuts” as they see fit.

        In commodity systems where the underlying asset does not (naturally) generate cash flows, the process is all about replacement value – how much labor/effort would it take to find more of this commodity? In our system now, the constraints is cash flows generated by real estate, the replacement value, and true supply/demand for using the real estate.

        • JKH says

          I think I’ve been guilty of semi-conflating fiat and endogenous from time to time – deliberately perhaps – with the hopes of drawing out someone like Brett to focus on the distinction.


          But there does seem to be some flexibility around the idea of fiat.

        • BF says

          Hi Mike,

          I knew not of the confusion of ‘fiat’ with ‘endogenous’ (should be easy enough).

          PK theory of EM is that private bank money creation requires dual willingness on the part of banks and creditworthy borrowers. Creditworthy subsumes the debtor’s collateral (along with other things).

          You are correct that the US economy along with others have become ‘housing/mortgage-based economies’, that is, over-burdened debt pyramids (including quasi-debt derivatives) surrounding non-fecund real estate. Even the proportion of mortgage finance which goes into new housing is still money lent and spent on non-productive capital assets (I consider residential investment as quasi-consumption because beyond the construction it does employ or yield an income other then rent say relative to a factory). There is also a proportion of mortgage finance ‘locked up in the buying and selling of existing structures’ that just goes to maintaining or inflating prices which is what it is.

          Many if most macro models I see still exclude real estate lending. If household borrowing is included it is done as if it were like consumer credit. Big hard issues; need to get cash flows going in real estate to lift the economy, but housing will always be a faulty rudder compared to debt-financing for proper capital assets.

        • BF says

          I do need an editor “I consider residential investment as quasi-consumption because beyond the construction it does {NOT} employ or yield an income other then rent say relative to a factory).”

        • Michael Sankowski says

          “If household borrowing is included it is done as if it were like consumer credit. ”

          Another wrinkle is that it is not a pure real estate standard. It’s more like a 60% real estate, 30% capital improvements, 10% consumer credit standard. And another problem is that we cannot easily loan against all of the potential real assets we have. We lend against residential real estate because it’s relatively easy to package, compared to things like the Sears tower. The frictions involved with loans against other real assets are gigantic, even compared to the huge administrative losses in lending against residential real estate.

          “Big hard issues; need to get cash flows going in real estate to lift the economy, but housing will always be a faulty rudder compared to debt-financing for proper capital assets.” It’s totally true. What the banks lend against have hard constraints, and it makes a difference to what and how everything happens in the real world. If real estate was massively undervalued right now, we would not be in a balance sheet recession, no matter the absolute nominal level of interest rates. We could just juice housing prices by cutting interest rates and be done with it, and this is something which the current dominant economic structure could do tomorrow.

          Then another even larger problem is the one of the foundational ideas of progress is “doing more with less more quickly”. Lending against some huge steel mill made sense when there were huge steel mills that would last for 50 years. Now, far smaller properties with less “stuff” on them makes better consumer goods. It’s smart to lend against AT&Ts millions of miles of wires connecting every house in the U.S., not as smart to lend against smaller, less expensive cell towers which could be obsolete in 10 years. That’s real money which won’t enter into the rest of the economy, or needs to be repaid on much quicker time frame.

          I really think smart cars are a massive threat to our prosperity. They are such a change in our society, such a fundamental change in the way we will lend money as a society. How much of what we do today is based around the way cars work today? So, so much. This is a huge deflationary force not just from “cheaper stuff” point of view but from the “less money around” point of view.

      • JKH says

        perhaps in parallel with all this is the misinterpretation of the Volcker tightening as the suspension of the operation of endogenous money – something that in my impression Volcker himself (and his Fed) didn’t entirely understand at the time

        • BF says

          I made at least one typo at February 20, 2013 at 9:29 pm: “that should [not] confuse…”

          Certainly, the experiment with monetarists operating procedures in the 1980s was nothing less than an unmitigated disastrous; for the US economy (and developing nations caught up in an external debt crisis) and for Friedman. Someone clever said words to the effect that monetarism suffered the indignity of having its postulates put to the test in practice.

          Unfortunate that most economists do not understand EM. The economic system has moved onto near-monies (derivatives, repos, CDS) with a frightening degree of endogeneity while its theorists lag not yet understanding the cheque system.

    • Michael Sankowski says

      This is very much my view as well. Money is always and by nature endogenous; it cannot be otherwise. We just usually put some constraint on the creation of money. The real estate money system we live under now has the same basic idea as a gold standard behind it, where we create money against real estate instead of gold. But in any case, the creation of money involves changing numbers in a ledger somewhere, and thats how and where money gets created. The backing behind that money can be extremely important to the ongoing effects to the overall system, but that consideration is all about the constraints.

      • JKH says

        The scary thought for me has always been:

        If mainstream is so lost in general about the nature of endogenous money in 2013 – then what are we to think about mainstream’s efforts to record the history of money and the history of how banks worked?

        And that goes for certain modern heterodox interpretations that emphasize 1971.


        And that’s on top of historical disputes such as those Brett has noted.

        Back to the drawing board, boys.

        • Cullen Roche says

          We’re drawing on the board, aren’t we? 😉

        • JKH says

          how true


        • Michael Sankowski says

          Steady as she goes.


          Well, we’re pissing off the Austrians, the MMTers, the monetarists, the Keynesians. ( I saw that tweet and really laughed today, and I needed it!)

          “Govt is a social construct to help facilitate private sector life. And a powerful tool it is. ” Yep. Same with money. It’s just a tool to make us real world richer.

        • beowulf says

          “Well, we’re pissing off the Austrians, the MMTers, the monetarists, the Keynesians.”
          Yeah, its funny how they get pissed for so many different reasons that , in aggregate, they cancel each other out.

      • Cullen Roche says

        Yeah, and not just money. The system itself is endogenous. The idea that there’s even an exogenous portion is the result of an extension from the inherent endogeneity of the system itself. That is, the money system exists for private purpose primarily. Resources precede taxation. Govt is a social construct to help facilitate private sector life. And a powerful tool it is. If more people understand these basic points we’d probably get a lot more out of the whole system….

  22. Geoff says

    Excellent stuff by Soddy and a great post by Dr. Brett. My first exposure to the idea of endogenous money was the essay “What is Money” by Mitchell Innes, written in 1913. I know Innes is recommended reading by certain MMTers like Mr. Mosler, but it seems to fit MR like a glove.

    • Michael Sankowski says

      Mosler is like the intro drug to endogenous money. I got my start over there.

      Also, I’ve got a “Soddy guy” who will show up here at some point I hope. He’s been on me to read Soddy and never did.

      • Clonal Antibody says

        I have most of Soddy’s books on my computer. Makes for interesting reading.

      • Tom Hickey says

        Herman Daly is a Soddy guy.

      • Geoff says

        Thanks, Michael. I’m going to have to read up on this Soddy, dude, too.

        Brett, if I somehow implied that Soddy was MMT, then I clearly didn’t express myself well. My apologies.

        • BF says

          Sorry, Geoff, I have seen the work of Innes used sometimes to infer positions on how the modern monetary system operates today rather than say before the Federal Reserve System Act of 1913. Note also that Soddy is the father of ecological economics, that is, the reality that natural capital and ecosystems are part of the Wealth of Nations (not “externalities” as per orthodox economists).

        • beowulf says

          I guess Soddy really was the first Nobel Prize winning economist (even if it was for Chemistry).
          Great piece Brett, that’s sort of cold that Fisher didn’t cite Soddy.

        • Tom Hickey says

          Probably understandable since Soddy was regarded as an economic crank in his time, and Fisher didn’t want to create the association. Keynes didn’t cite Marx either, for similar reasons.

        • stone says

          Kalecki’s work was nearer to the General Theory wasn’t it? Bill Mitchel says, “The issue of whether Keynes had been influenced by Kalecki’s earlier work remains unresolved. Staunch followers of Keynes say no, whereas those scholars who do not see Keynes as being the central figure in the development of the theory of effective demand, such as me, lean to the view that the transition from the Treatise (1930) to the General Theory (1936) was so great that it is likely that Keynes knew what Kalecki had written and published and was influenced by it.”

        • BF says

          I would not make apologies for Fisher. Soddy was after all correct on how banking worked. He was a monetary system revolutionary and threat to the moneyed-powers of his day; hence, the labeling of ‘crank’ was nothing more than a bastardised means to discredit without considering his arguments.

    • BF says

      Thanks Geoff. Innes was in the Chartalist tradition. He wrote some interesting analysis that was perhaps appropriate for the monetary system in which he resided. Certainly, little has changed regarding the efflux of bank money (creation) followed by reflux (destruction), though with the US Federal Reserve System Act of 1913 (and with the Fed operative in time for the war) it soon became inappropriate to use similar language for State Money (except in explicit reference to the activities of the central bank undertaken typically for monetary policy purposes).

      Obviously, as the federal government is a now currency user (with its budgetary operations requiring dual-clearing in central banks and private bank monies), it is highly misleading to suppose that federal government spending creates money while taxation payments destroy money. It could be argued that such ventures increase or decrease the stock of money circulating outside of the government’s coffers; nonetheless, as the Treasury’s deposits at the Fed are “money” the language of efflux/reflux or creation/destruction make little sense. A claim that federal budget deficits lead to ‘net credits to bank reserves’ (with T-bonds sold to drain excess reserves) is alas a failure to do or to appropriately understand the balance sheet accounting of the US Federal Reserve System.

      Soddy does not fit MMT like a glove. The former described the monetary system for what it is (i.e. a virtual-monopoly of private banks and private interests). Respectfully, I hope the comments section does not degenerate into something about MMT; when the post is about Soddy getting endogenous money (which cannot be said for Keynes and not always for Minsky).

      • JP Koning says

        Efflux and reflux. That’s banking school jargon — Tooke, Fullarton, and good old Adam Smith’s territory.