The reason I attacked Werner's article is that he mystifies money creation and perpetuates the misconception that banks' ability to create money is similar to central banks' ability to create money (he does not directly say so, but a non expert reader is likely to gain this misunderstanding when he uses terms like "fairy dust" etc.).
In the article I attacked 2 specific claims of Werner. One was patently false. The other was correct due to a technicality only.
Although "technically" I agree with your article, banks have a legal definition, legal power and legal responsibility. That makes them special and gives them the legal power to create money -- not without limits, though. Banks can -- subject to some rules -- borrow money from the central bank, which will create said money for them. With repo rates hovering zero and all processing happening electronically, "out of thin air" is not really that far from reality. :)
I would argue that if I issue you an IOU, that is not real money: I do not hold a banking license, I do not keep track of all IOUs, I have no audit to pass once-a-year. In fact, I might drink away your deposited cash next day. :) The Full Tilt Poker example is relevant, but I would argue that that is illegal banking: It happens, but it really shouldn't. Wirecard is the other extreme: They were a bank (legally) and created money against the rules (I'm a bit oversimplifying).
I guess the common person needs to be educated about legal powers: For example, what makes this house special that I own it? A large enough hammer can open the door, as easily as my keys. In fact, if I sublet it, I might not even have the keys! Ownership, as money, are legal constructs that only hold value if they are properly enforced. Of course, enforcement is easier the more society accepts the construct.
Yes, but that is relatively recent development. Bank money (and IOU-based money creation) is much older than deposit insurance.
I'm thinking of things like https://en.wikipedia.org/wiki/Liberty_dollar_(private_curren... which ended in FBI raids.
Even if everyone agreed to use your IOU from the article the tax office is going to have quite a bit to say on the subject and probably start launching audits. And if the IOU start getting traction they are likely to trigger police raids and maybe a legislative response (look at how Facebook dropped their Libra for example). That seems substantially different from the IOUs the banks can create.
I wouldn't use bank-issued IOUs if I thought I had a choice. I'm pretty sure I'm forced to by government policy.
IANAL, but the IOUs created by Full Tilt Poker were also legal to use. When the government eventually pressed charges in the debacle, no charges were pressed against regular players of the poker site, including those who used these IOUs for small economic activity. If using these IOUs would have been illegal, then surely the government would have pressed at least some charges after spending years investigating the case?
But anyway, even if _using_ the IOUs was not illegal, creating them like a fractional reserve bank surely was illegal. So you definitely have a point that the regulatory environment creates a special status for the legal tender of the country.
When I give a Amazon gift-card to someone, it is an IOU against Amazon, and most people will gladly accept it as money.
Full Tilt Poker created a small closed e-money system which was seemingly legally fine; it was the gambling that got them raided, because only mob bosses in politically connected US states are allowed to profit from gambling and the US will go after gambling providers in other countries.
Liberty reserve were facilitating money laundering. This is the difficult bit - if you provide an electronic facility for easy transference of ownership of debts or e-money, the authorities want access to the paper trail.
No, there's a big difference, in that you don't have the right to redeem ("put") the corporate bond any time at face value.[1] You do have that right for the IOU that is your bank account. This allows two people to carry on as if they both are full owners of the dollar in the bank account (both the depositor and the business it was lent to), and that mechanism is what allows the money supply to increase.
When you don't have that right, you, as the corporate bond holder, know that you can only get the money out early by selling the bond at its current market rate, whatever that is, which may force you to take a discount. This expectation -- and the necessity to redeem it for someone else's dollars on the market -- prevents it from being money creation.
[1] There are "puttable bonds" where you can do something like this, but it's over specific intervals and times, not immediate. https://en.wikipedia.org/wiki/Puttable_bond
- How do you explain that the M2 money supply is always going up? Where is all that new money entering into the system? Government contracts funded by government bonds? If that was the case, government contractors would be getting very wealthy and everyone would be working for them (directly or indirectly)...
- How do you explain the recent, significant, almost instantaneous jump in stock prices of major tech companies after the Fed printed and injected trillions of new dollars into the economy? Did these corporations all suddenly score huge government contracts from the bonds which the government created? Seems more like investors and company insiders used loan money from banks to do stock buybacks or increase their positions.
- Under the model suggested by the article, how does one explain why there are so many millionaires are in the real estate industry? If you assume the opposite argument that banks are able to print money (directly or indirectly), the number of millionaires makes perfect sense since everyone buys houses using 'loans' from banks; so it's natural that all this free money from banks would constantly inflate real estate prices; each new generation of citizens would inflate the prices of the properties which were bought by the previous generation with increasingly larger loans from newly printed credit from their banks.
What is claimed by the article does not match the evidence, even the people have wised up to this scheme which is why Bitcoin and cryptocurrencies have been able to hold their value.
"creating money" is ambiguous to be nearly meaningless, "creating money in a way that noone else is able to" is a lot less ambiguous
Nonetheless, this is all irrelevant, people cannot legally create money (that would be counterfeiting), they can only create assets; only banks can create money and they can cherry-pick who is allowed to get credit and who isn't using whatever rules or metrics they see fit. All the new money enters the economy through loans and government bonds. Companies and individuals who are close to the money printers get most value out of the new money since they get it first (Cantillon effect). By the time inflation kicks in, these people who are close to the money printer will be able to take another bigger loan in the future using their existing collateral which will undoubtedly be worth more due to inflation in the nominal monetary 'value' of that collateral.