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Comment by jdimov | Hacker News Reader

What all of this discussion is severely lacking is an understanding of how money actually works and how it is created. In a modern economy, money is created by commercial banks every time a bank makes a loan.

So the questions in this article are a bit off. E.g.: "What happens when you no longer need a bank to provide capital? Where will people store money in the future?" These questions are off-target, because it's not so much about where people store it, or how it moves around. If you want to replace banks, you will need some other mechanism of money creation on-demand, and I'm not at all convinced that 'bitcoin mining' is the correct kind of answer...

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What this discussion lacks is a basic understanding of economics. It baffles me every time!

No one on HN would stand it for one second if a group of gardeners suddenly popped up and only with their knowledge and mastery of agriculture and botany decided to teach all the engineers and programmers a thing or two!

But by some miraculous logic, programmers and engineers are now pretending like they can replace wholesale the system that economics is built on and has mastered over hundreds of years of theory and practice.

ps money is not created by commercial banks but by the Fed through their ability to either buy or sell treasuries issued by the government but maybe that's splitting hairs

David Graeber from the Guardian writes that:

When banks make loans, they create money. This is because money is really just an IOU.

And that the paper:

...co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong.

The truth is out: money is just an IOU, and the banks are rolling in it http://www.theguardian.com/commentisfree/2014/mar/18/truth-m...

The Bank of England Paper: Money creation in the modern economy http://www.bankofengland.co.uk/publications/Documents/quarte...

Edit: added more text to second quote.

It depends on what your definition of money is. Banks do create money in the sense that bank deposits are money. He is correct in saying that loans create new bank deposits.

"ps money is not created by commercial banks but by the Fed through their ability to either buy or sell treasuries issued by the government but maybe that's splitting hairs"

That's using an overly-restrictive definition of money (M0, or "monetary base") that doesn't mean very much in terms of how the economy works. Banks do not create new dollar bills, but they do create new "dollars on deposit at a bank" which I can spend very nearly like a dollar bill (sometimes quite a bit more conveniently) by writing you a check or setting up a wire transfer. This is what many people are paid in, and pay their rent and grocery bills in, and considering it "not money" is wrong. Economists include this in M1, which is a slightly broader measure of the money supply. There are still broader measures.

Agreed. Upvote. And those banks get their legitimacy from the federal reserve system which provides a stable interbank payments system as well as deposit insurance. Also, money is created when the federal government spends more than it taxes.

You are right in pointing out that there is a lack of understanding of what modern money is and where it comes from. For better or worse, its a creature of the state. This article touches on some of it : http://dailyreckoning.com/the-real-reason-the-u-s-dollar-has...

"What happens when you no longer need a bank to provide capital?"

In times of computers we basically do not need money anymore. As a result we do not need banks.

Why? - There was a time no money existed. People bartered items. e.g you create cups, because that`s your passion and the only thing you can do. Well, you can not eat them. You go to a marketplace to get things you need.

How do you get them? - You label each cup you created with a need. Let`s say 1 cup OFFER is labeled with the NEED of 1kg Apples.

You do not even have to leave your stand to get 1kg Apples, because there is a salesman running around looking for someone who offers apples. The Apple man don`t need cups but a board and so on...

In times of computers and robots the logistics to find the right combination of OFFERS and NEEDS should be no problem.

This kind of trading might even be faster than bitcoin. Just because there is no money in between your offers and needs.

It would also change the mindset of what do I really want to offer and what do I like and need.

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