The first paper mentioned, Money Creation in the Modern Economy, is available here:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I wonder if a survey about this has ever been done, but I suspect only a very small percentage of people really realise that banks, private banks, simply create the money they loan you themselves, as they wish.
Reminds me of that quote: "if the average man realised how our banks work, there would be revolution in the streets tomorrow".
What is the concrete problem that this system creates in your opinion?
Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
The problem in 2008 was subprime loans that should never have been allowed, it wasn’t that banks could create enough money. Inflation after Covid was caused by central banks, not private ones, and it was done on purpose to avoid a recession. I don’t think these things are inevitable consequences of private banks creating money.
> Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power.
Banks are given that privilege in exchange for being regulated to hell. They get a kind of monopoly over these profits in exchange for doing things like being forced to bank everyone, including unprofitable customers. Without this incentive, who would do the banks’ job?
The fed still has other requirements for use of their facilities and every bank that lends money is covered by a wide swath of regulators that have their own asset to liability and loan makeup requirements.
But the reason most countries no longer have reserve ratios is because these ratios have been replaced with capital requirements, which likewise constrain bank lending activity. Apparently some people didn't get the memo though, and think banks are now unregulated and can do whatever they want. In reality the banking sector is one of the most regulated industries, and for a good reason.
Similarly, if you go look at the M1 money supply chart you see that vertical line. The average person goes "WTH!!" and they are told "The vertical line is where we changed how the M1 is calculated" and the average person goes back to sleep. But even a middle schooler knows you can't just arbitrarily change how the Y axis is calculated mid-stream. It makes the chart useless. They could have back-filled with the new way of calculating or forward-calculated with the old way for some period of time. The chart is useless on purpose. It's friction between an average viewer and understanding what happened in the economy. And only "weirdos" and "conspiracy theorists" bother to overcome the friction to try to figure out what goes on.
But it's not 'as they wish' as you say, depending on where they operate, they are typically constrained by capital and liquidity ratios set by their regulator.
I feel like I have a pretty solid grasp on the operational mechanics of money creation, but I don’t for capitalization. The whole thing seems a little dippy though. For example isn’t the Fed “capitalized” by its largest borrower, the Treasury?
All that being said I doubt loan officers check their capitalization ratio before originating a profitable loan to a creditworthy borrower. I imagine another department checks the ratios from time to time and sells or resells loans for cash or stocks to increase the capitalization ratio as needed. I’d love to hear from someone who actually handles this.
But a better alternative? Well, cryptocoins are not exactly simple either(despite their other flaws). And most other concepts I have heard of, are hellish in the details, too.
In part, I think that is why so many criticize it.
In terms of details, Bitcoin is straightforward. It can be boiled down to: instead of obscuring the system we use globally for exchanging value—leaving it prone to manipulation and corruption—Bitcoin makes this system trustless (meaning you don't have to take someone's word for it), transparent, and accessible to anyone, without limits, allowing them to transact globally.
The reason most ignore Bitcoin is because the very people that run the existing system have the ability to push propaganda against it. The two favorites being:
1. It's bad for the climate (ignoring the existing system's required infrastructure which makes Bitcoin look like a hippie commune).
2. It doesn't have enough transaction capacity (ignoring or being oblivious to the Lightning Network/off-chain settlement).
There is no technical reason that Bitcoin can't work; it's purely a problem of perception and operant conditioning.
What don't you understand?
And I could not explain the concept of cryptocoins to children either. Nor adults actually, unless they have a background in math.
I mean the concept of the blockchain, allright. Even people who do not know cryptoalgorithms can get it. But mining coins? You can mine gold, that is understandable, but mining numbers? How do you explain that in simple terms?
Similar to how mining for gold requires repeated strikes of a pick to reveal nuggets of gold, "mining for Bitcoin" requires repeated attempts to guess a random number (strikes of a pick) which has a shifting difficulty due to how many miners are trying to do the same thing (not unlike an increased difficulty of finding gold when there are multiple miners prospecting in the area).
Assuming you didn't trade for/buy it off of someone, having a Bitcoin is analogous to having a gold nugget in that it proves you did the work (proof of work) to get it (picked at rocks, or, expended the necessary computation cycles to guess the correct number/nonce).
Edit: Just like the amount of gold in the world is dictated by how much has been mined, the same analogy plays out for Bitcoin. The only difference is that the maximum amount of Bitcoin that can be mined is known and enforced algorithmically whereas physical gold is a guess/estimate.
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In terms of explaining it to others, they don't need to understand all of the technicals to "get it." People don't understand (technically) how their iPhone works but they "get it" and are able to use it.
It is really not analogus. A gold nugget is something material, with a practical value. You can make electronics or jewelry out if it.
But some random "mined" numbers? Why do they have value? They don't. Unless others accept their arbitary value. Which to me is not much different, than fiat money.
It somewhat works, if people accept the weirdness of the concept, but a intuitive understanding of value, like with gold, I cannot see.
The random mined numbers are not where the value is stored. Those numbers just confirm that the miner who finds/guesses that number did the necessary work to find it, and in turn, validate the authenticity of the current block of transactions. Their reward being Bitcoin for doing the work (how Bitcoin comes into existence).
That Bitcoin has value because it represents energy or work expended, just like any currency—dollars, vodka, whatever. That's the whole reason any currency exists: as a medium to trade value generated by one person's work for the results of other people's work. Instead of physical labor, though, the work being done is computation.
It also has value because of how the underlying system that backs it works. In fiat systems, the rules about how much money is in existence, who can or cannot access the system, and the ability to accumulate savings is dictated by a central authority. With Bitcoin, there is no central authority. The amount of Bitcoin produced cannot be changed without fundamental changes to its halving algorithm which would result in a fork of the network, creating a brand new currency (with the original network continuing on uninterrupted by people who disagree with the new rules).
This is another reason Bitcoin is valuable: everything is driven algorithmically by consensus, meaning, humans can't alter it on a whim (like a fiat system). Instead, the only way to make a change is to propose it in the form of a code patch and then have the rest of the network accept that change. If the network doesn't accept it, the change doesn't occur. In terms of money, there's never been a more valuable form (there is no analog for a form of money that doesn't require human trust—Bitcoin is unique in that category).
Beyond that, it also has value because it's digital and permisionless. I don't have to get a bank's permission to do business or transact with someone else. I can just _do it_. And I can do that on a global scale, instantly. Contrast that with the existing system, any amount over a few thousand dollars triggers red flags, transactions get blocked, and insane amounts of time and energy get wasted just for you to get access to your money (that most people don't view that as patently insane proves how well the conditioning works).
Even further, Bitcoin isn't something that can be confiscated (like fiat, precious metals, or other assets). This means that corrupt governments and individuals can't just blindly steal from you. The only way to get your Bitcoin is to get access to your private keys. The only way to get those is, ultimately, by force/violence (i.e., they can't just dip their hand into your bank account and clean you out because of a "law" they invented). And that only works if your private keys are accessible—though difficult, you could memorize them creating the ultimate security system.
The best part and why Bitcoin is extremely valuable: its base cannot be inflated. Meaning, when I work and earn money, that money either retains its current value, or, increases in value. There's no potential for a government to randomly print off trillions on a whim and devalue the money I've already earned (essentially, stealing my life from me covertly).
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All of the above is radically different from fiat money. Again, we've never had a currency like Bitcoin in the history of humanity (in part, why it's so difficult for people to understand it). It's like showing fire to cavemen.
There is RAI which is an algorithmic stablecoin on Ethereum which fails to scale.
I can imagine a world where in 10 years people figured out how to build a price level targeting cryptocurrency with neither inflation nor deflation on a platform which is fast enough to process every day payments and which people in developing countries adopt to minimize volatility and avoid inflation in their national currency.
Those days are far into the future and they have absolutely nothing, nothing to do with Bitcoin. Maybe Ethereum if they solve the scalability problems. Maybe Solana if they build a RAI inspired stablecoin. Maybe a completely different platform but certainly not Bitcoin.
Okay! Then why don't families and individuals have an equivalent mechanism? Set capital and liquidity ratios by law. E.g.: if you have 10k$ on hand, you can create 100k$ of liabilities. If you have 10k$ on hand and 50$k in medium-risk investments, you can create 300k$ of liabilities, and buy a house that way. Something along those lines.
Of course, since ordinary people can't do that, they need to go to middlemen: the very banks who can do that x) Doesn't strike me as very fair.
As soon as you start taking other people's money you are subject to a ton of regulations for limiting fraud. In the above example if you took the funds and bought a house you'd be potentially guilty of fraud.
I for one did not realize that. I thought that was what the single nation's central bank does. If strictly true, how does anything work, I. E. Why would they not just create money ad infinitum? I imagine there are crucial, critical details to that "simply".
More or less.
What people tend to forget is banks are just "middlemen" - they are a mechanism to facilitate trade and not much else.
2. What value or service does this middleman provide? Why can't businesses and families and individuals get money by crediting themselves the money and creating a matching liability? This is what banks do.
2. Mostly pensions and pension funds - saving work now for payments later when you can't work - see 1.
2a. Additionally funding large projects which no one individual/institution can afford no matter how wealthy, such as building huge infrastructure projects like silk road and other national infrastructure. See 1.
Northern Ireland and Scotland do this too, but there it's kind of obfuscated by both being interchangeable with the British pound, while the HKD stands alone.
"This description of the relationship between monetary policy and money differs from the description in many introductory textbooks, where central banks determine the quantity of broad money via a ‘money multiplier’ by actively varying the quantity of reserves.(3) In that view, central banks implement monetary policy by choosing the quantity of reserves. And, because there is assumed to be a stable ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank deposits as banks increase lending and deposits. Neither step in that story represents an accurate description of the relationship between money and monetary policy in the modern economy. Central banks do not typically choose a quantity of reserves to bring about the desired short-term interest rate.(4) Rather, they focus on prices — setting interest rates.(5)"
Does that mean the whole "Fractional Reserve Banking" explanation is not how it works?
Banks would always have tracked accounts via ledgers though, it's just that before fiat currencies they had reserve requirements in place to ensure banks kept enough currency on hand to handle day to day withdrawals.
https://www.investopedia.com/terms/f/fractionalreservebankin...
Genuinely curious!
But the Bank of England explanation is a lot better.
> This is not how money is actually created but only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics professors, it is generally regarded as an oversimplification by policymakers.
And from the Bank of England's (very good) primer on money creation:
> Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
> ...
> Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits
The "money multiplier" concept of FRB is a useful model in the same sense that modelling an atom as if it were like a solar system with a solid nucleus with electrons whizzing around it like planets i.e. not really 'true' but a useful-enough approximation for many use cases.
The BoE primer explains all of this very clearly on the first couple of pages, it's well worth reading:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
When a bank considers giving a loan, can it model where the money would/might be eventually transferred to - whether it would stay on the bank's books and thus require less liquidity to cover net outflows?
I have the impression that central banks try to model national economies via "flows between large groups of actors", do commercial banks analyze/simulate this too on a (smaller) scale, to find out how not only money flows between them and other banks, but within itself too? Since accurate models would result in more profitability, is it safe to assume that banks have the best economic "world model"?
When I buy groceries, I have no idea where the money ends up even in the next "step", maybe banks attempt full "network simulations"?
Regarding the cooperation/net flows, wouldn't a more "symmetric" banking system be able to create more credit? https://github.com/void4/notes/issues/73