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by Christian Siedenbiedel, W Storz and A. Muelle
Wednesday, Feb. 29, 2012 at 6:35 AM
To give a credit to a customer, a bank doesn't need to take the savings of another cutomer from its vaults. It creates the money out of nothing. In a countermove, the bank must deposit money with the central bank. There is a debate whether the creation of money can be left to the banks.
CREATION OF MONEY. HOW DOES MONEY COME INTO THE WORLD?
BY Christian Siedenbiedel
[Every normal bank can create money, not only the European Central Bank. Its credits are created out of nothing. Is this bad as Occupy claims? This article published on 2/5/2012 is translated from the German on the Internet, http://www.faz.net/aktuell/wirtschaft/wirtschaftswissen/geldschoepfung-wie-kommt-geld-in-die-welt-11637825.html#Drucken.]
Banks cannot print bills or mint coins – and yet create money.
Some things are so self-evident that we don’t reflect about them. One of them is money. One takes the bils from the automatic machine, puts them in the billfold and uses them for payments. But where does the money come from? It is printed somewhere, one thinks.
The Occupy movement critical of banks offers the provocative thesis that banks create money in our economic system. Critics of capitalism do not like this. Profit-oriented private institutions that are in no way democratically controlled are creators of money. This is dangerous, Occupy says.
NOT ONLY BILLS AND COINS
Occupy is right with its explanation but not with its assessment. Banks create a large part of our money, large comme3rcial banks like Deutsche Bank and Commerzbank just like small national banks and savings banks.
Banks cannot create bills or mint coins. Only the European Central Bank and the national central banks can do this in the euro-zone. All others are prohibited by the state and punished with a “prison sentence not less than one year,” according to paragraph 146 of the penal code.
However the banks’ creation of money is of another nature. Whoever wants to understand has to first accept a definition: money nowadays is not only bills and coins. What slumbers somewhere in accounts is genuine money. Money flows when numbers move from one account to another. One can buy things.
This electronic part of money is even the large part. In Europe there is a so-called solvent money supply (experts call it “M1”) of 4.8 trillion euro. That amount includes 58 billion euro cash in bills and coins. The inconceivably great remainder only exists in accounts, the “night deposits.” This money is mainly created by the banks.
How do banks do this? They create money by awarding credits. Most of our money doesn’t arise through the processing of precious metals as in earlier centuries. In their time, Aristotle and Plato philosophized whether the value of money originates through the metal value of the coins (“physis”) or through the nominal value that the state sets by law (“nomos”). Today money arises through the diverse contracting of debts. What is paper money other than a kind of promissory note or IOU of the spending state that lives from the trust that is always honored or passed on?
MONEY CREATED OUT OF NOTHING
The money created by banks, the so-called “book money” or “giral money,” is not very different. This kind of money originates when a bank gives a credit to a customer and credits the amount to his account. The customer (whether a private person, a business or the state) can use the amount as money… The amount is not only “like money;” it is money.
To give a credit to a customer, a bank doesn’t need to take the savings of another customer from its vaults; it creates the money out of nothing. In a countermove, the bank must deposit money with the central bank for the cr3edit – the so-called minimum reserve. The minimum reserve is much smaller than the credit. For a long time, it amounted to two percent of the credit sum and then was lowered to one percent. A bank that wants to award 10,000 euro in credit needs 100 euro minimum reserve.
DEPOSITING SECURITIES AND PAYING INTERESTS
The bank doesn’t have to raise this money through savings deposits. Rather it can receive credit on its side from the central bank. Then it has to deposit securities and pay interests.
If the secured money lands as a deposit with another bank, this other bank can also award a credit. The banking system as a whole creates many times the amount of money at the beginning. Economists call this “multiple creation of money.”
The central bank is the director. It has two powers with which it can control the process. First, there is the principle of the minimum reserve. Second, there is the interest required by banks for credits. If more is demanded, banks tend to hold back with lending.
BANKS ARE MORE CAUTIOUS
The question how much money do banks create does not only depend on interests and minimum reserve. At the end the question is how much credit do they award. If the economy runs well, many firms want credit and banks gladly give them credit so they can have a good business. If on the other hand the uncertainty is great, the demand for credit declines and banks are more cautious.
The latter is the case at the moment. The central bank gives cheap credits but is reserved with its creation of money.
Thus banks actually decide over the growth of the money supply along with private persons and businesses – to the extent that they lend or borrow money.
CREATION OF MONEY IS NOT DICTATED BY OCCUPY
Is everything as bad as Occupy claims? It isn’t bad as long as the central bank retains control. There is a debate in the discipline, not only with Occupy, whether the creation of money can be left to the banks after the experiences of the banking crisis. Professor Hans Christoph Binswanger who mentored Josef Ackermann, head of Deutsche Bank, is one of the protagonists.
Binswanger insists the minimum reserve should be raised to 100 percent. This would mean: banks must deposit a euro with the Central Bank for every euro they lend. The Central Bank would have complete control over the creation of money. The charm of the idea is that banks creating too much money causing bubbles and inflation could be avoided.
However the mainstream of economists considers this impractical. “With a minimum reserve of 100 percent, the banking system as we know it today would cease to exist,” says bank professor Hans-Peter Burghof. Volker Wieland, professor of money theory in Frankfurt, says: “The growth of the money supply would be controlled through the normal interest policy.” The European Central Bank has enough power to ensure stable money. It only needs the will to use that power.
WAYS TO A NEW MACRO-ECONOMIC ORDER
By Wolfgang Storz
[This article published on 2/9/2012 is translated from the German on the Internet, http://www.woz.ch/artikel/2012/nr06/sachbuch/21722.html.]
Can the deep chasm between poor and rich destroy a national economy? Is injustice a concrete economic problem and not only a moral and ethical problem?
Gustav Horn sees it this way. The renowned economist Horn starts from the assessment that the financial market crisis is not banished because its main cause is not removed: the increasing inequality. Politics only briefly debated and then forgot the lessons from the debacle, Horn writes. His crucial conclusion is that Germany has gone the way to a plutocratic system, a system governed by the rule of wealth.”
The increasingly powerful and ever-larger financial industry that directs the money streams according to its norms and values contributed to this on account of political decisions – a financial industry at whose top is a worldwide elite that with its values and norms moves “outside present societies.”
Gustav Horn explains in detail how today’s conditions were slowly created from the 1970s and how German politics shifted its power to the financial markets. Her is intensely occupied with the question how the German agenda- and tax policy under SPD chancellor Gerhard Schroeder (1998-2005) essentially changed the labor market and the distribution of incomes and assets. The author reconstructs in detail the development of the financial- and economic crisis and concludes that “a new macro-economic order” must be built.
Many authors end their books with such or similar appeals. Gustav Horn is different and sketches alternatives on sixty pages. Some readers may find reading this book rich in facts with excursions in theory is hard. Horn argues very profoundly in a detailed way. When he writes understandably and summarizes his multi-layered findings, one must concentrate with a glass of wine.
Gustav Horn is one of the few profiled economists in Germany who represents a fundamentally critical position. He is director of the union-friendly Institute for Macro-Economic sand Economic Research. That an expert like Horn competently analyzes and interprets events and presents and substantiates theses is helpful for public debate.
“THE IMPOVERISHMENT OF THE STATE AS A STRATEGIC LEVER”
By Albrecht Mueller
[This article published February 14, 2012 is translated from the German on the Internet, http://www.nachdenkseiten.de/wp-print.php?p=12218.]
This strategy was repeated last week as so often recently. This time it was practiced in the Ge3rman government’s dealing with Greece. The strategy is also mentioned in a two-page essay by Barbara Supp in: Spiegel 6/2012 “Merciless Samaritans. How Margaret Thatcher and her German students created market-conforming democracy.”
Hopefully many Spiegel editors and others read or will read the text of their colleague…
The impoverishment of the state is the “strategic lever” for all sorts of things: for privatization, cuts in wages, starving out public services and reducing public necessities. The impoverishment of the stat3e leads to constant complaints about the state and thus continues the abandonment of services in public responsibility.
This strategy is applied again in Greece: reforms, austerity, reducing state activity and dismissing employees – on order of Berlin, Brussels and Washington (IMF).
For all who suspect conspiracy theories, here is a statement of an “expert” of the neoliberal movement quoted by Barbara Supp. It is embedded in her text:
“In the nineties, an expert well-known in economic circles wrote the state must lose power. However resistance can be expected. The problem can be solved by lowering taxes. “The dictate of empty treasuries” is necessary. We need “an offensive deficit” so the state can be whittled down. Very bluntly we read: the state should become more powerless and poorer out of principle, not out of necessity. The one who wrote this was not a stranger from a foreign place. It was Herbert Giersch, a scholar who died in old age a year and a half ago who for decades was regarded as a “dean of the German economy.” He was a government advisor, a founding member of the “fived economic wise men.” Director of the Kiel Institute for World Economy, a textbook writer and instructor of several generations who can be found today in banks, associations and businesses. One of the leading neoliberal economists, he was like Thatcher a Hayek follower to whom every classical market liberal and every classical business-friendly policy refers.
The Spiegel author is wrong in a few things. However that does not diminish the value of her essay.
• For example, Barbara Supp ignores that Ms. Thatcher did not begin the madness. The madness was practiced in Chile after 1973. Naomi Klein described this very well in her book “The Shock Doctrine.” In my book “Propaganda” (Meinungsmache), I developed her ideas. In that book, I also described how the principle of impoverishment was already introduced in the public debate and converted in policy by tax cuts among us in the seventies. Nevertheless Margaret Thatcher has the dubious distinction of massively advancing neoliberal ideas and practice.
• The author also forgets the Lambsdorff paper of September 1982 and sets the introduction of neoliberal ideology too late.
The reference to the quotation by Giersch is valuable for all who argue about the destructive strategies of the neoliberals. In addition, there is an open enlightened analysis of the strategy behind the “dictate of empty treasuries” that is astonishing for Spiegel.
Video: John Kenneth Galbraith, 2008, 52 min
Hild, Thorsten, "The Rule of Supply-Side Economists," January 2012
Konicz, Tomasz, "The Crisis Explained," December 2011
Lansley, Stewart, "Managed v. Market Capitalism," January 2012
Mosler, Volkhart, "Capitalism Criticism 2.0," November 2008
Reuter, Norbert, "Stagnation as a Trend," 2009
Rogall, Holgfer, "The Invisible Hand Doesn't Help Any More," December 2011
Schulze, Ingo, "Capitalism Doesn't Need Democracy," January 2012
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