| Subject: | [socialcredit] Fungibility: replying to Chris Cook | | Date: | Sunday, April 30, 2006 21:24:32 (-0700) | | From: | William B. Ryan <w_b_ryan @.....com>
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[Chris Cook] "Banks 'monetise' OUR credit by issuing
IOU's which are then used as Money. These are not
ENTIRELY Valueless - since they are based in part upon
Banks' Capital bases (hence Basel I and II Capital
Requirements) but they are for the most part
Valueless, backed only by government fiat/acceptance
for payment of taxes."
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Basel capital requirements are regulatory criteria
within the Basel regime that tell us nothing about the
fundamental nature of banking. There are other
regulatory criteria utilized elsewhere. Bank credit
as reflected in deposit balances transferable from
person to person by check or electronically (or in the
form of bank notes) have value to the extent they are
generally accepted, not merely because they are
accepted by government in payment of taxes. Because
it is generally accepted, I am willing to accept it
when you tender it to me because I know I can readily
spend it on the things I want.
There are several functions of banking and services
they supply for which they are entitled to reasonable
compensation. The primary function of banking in
respect to our discussions is that it supplies
fungibility to our individualized creditary
instruments (promissory notes, stocks, bonds, etc.) by
exchanging their generally accepted creditary
instruments (assets to their holders - liabilities to
their makers) for our individualized creditary
instruments which are not generally accepted in trade.
It is one factor that makes competitive markets
possible, without which they would be impossible. It
also means QUITE IMPORTANTLY that banking is a natural
monopoly that requires regulation and public oversight
in predicate to the competitive free market, inasmuch
as supplying fungibility requires a great deal of
coordination between banks, conveying great power to
those in charge if unchecked. In this era of
ideologically driven "deregulation," we have moved
unfortunately in the opposite direction.
General Motors may spend, but the recipients of that
spending are not limited to purchasing Chevrolets.
They are free to purchase Fords or bass fishing boats
or anything else they want, when they want, if they
want. Conceptually, we may visualize it in terms of
the generalized ticket metaphor as opposed to the
individualized ticket metaphor. See
http://www.geocities.com/socredus/douglas_ticket.txt
---OVER---
[Chris Cook] "The vast bulk of Money is currently
'Deficit-based', but 'Property-backed'. It is this
deficit-based Money that is directly responsible for
asset price inflation resulting in a transfer of Value
from the rest of Society to those capable of borrowing
to acquire assets."
----------------------------------------------------------------
This can certainly happen if credit is expanded too
fast and irresponsibly. If done responsibly, it is an
important tool in the hands of the entrepreneur,
enabling him to continually organize the factors of
production into their more productive combination in
competitive markets, thereby benefiting the entire
society. It differentiates the West historically from
other societies with more crudely or less developed
crediatary systems (for example "Islamic" societies
and most of the rest of the world), in large part
explaining its enormous comparative prosperity in
respect of the mass of the common people within its
jurisdiction. In a free society the ultimate judge of
how good a job the entrepreneur is doing is the
consumer in reflux to the entrepreneur's spending as
determined by profit and loss. What we call "economic
democracy." Not some "benevolent" dictator or board
of bureaucrats utilizing Leontiefian input-output
tables mandating what is to be produced and what is
not to be produced in what quantities. Schumpeter put
it this way:-
"...Even though the conventional answer to our
question is not obviously absurd, yet there is another
method of obtaining money for this purpose, which
claims our attention, because it, unlike the one
referred to, does not presuppose the existence of
accumulated results of previous development, and hence
may be considered as the only one which is available
in strict logic. This method of obtaining money is the
creation of purchasing power by banks. The form it
takes is immaterial. The issue of banknotes not fully
covered by specie withdrawn from circulation is an
obvious instance, but methods of deposit banking
render the same service, where they increase the sum
total of possible expenditure. Or we may think of bank
acceptances in so far as they serve as money to make
payments in wholesale trade. It is always a question,
not of transforming purchasing power which already
exists in someone's possession, but of the creation of
new purchasing power out of nothing--out of nothing
even if the credit contract by which the new
purchasing power is created is supported by securities
which are not themselves circulating media--which is
added to the existing circulation. And this is the
source from which new combinations are often financed,
and from which they would have to be financed always,
if results of previous development did not actually
exist at any moment.
"These credit means of payment, that is means of
payment which are created for the purpose and by the
act of giving credit, serve just as ready money in
trade, partly directly, partly because they can be
converted immediately into ready money for small
payments or payments to the non-banking classes--in
particular to wage-earners. With their help, those who
carry out new combinations [the entrepreneurs] can
gain access to the existing stocks of productive
means, or, as the case may be, enable those from whom
they buy productive services to gain immediate access
to the market for consumption goods. There is never,
in this nexus, granting of credit in the sense that
someone must wait for the equivalent of his service in
goods, and content himself with a claim, thereby
fulfilling a special function; not even in the sense
that someone has to accumulate means of maintenance
for laborers or landowners, or produced means of
production, all of which would only be paid for out of
the final results of production. Economically, it is
true, there is an essential difference between these
means of payment, if they are created for new ends,
and money or other means of payment of the circular
flow. The latter may be conceived on the one hand as a
kind of certificate [ticket] for completed production
and the increase in the social product effected
through it, and on the other hand as a kind of order
upon, or claim to, part of this social product. The
former have not the first of these two
characteristics. They too are orders, for which one
can immediately procure consumption goods, but not
certificates for previous production. Access to the
national dividend [in the conventional meaning within
the terminology of economics] is usually to be had
only on condition of some productive service
previously rendered or of some product previously
sold. This condition is, in this case, not yet
fulfilled. It will be fulfilled only after the
successful completion of the new combinations. Hence
this credit will in the meantime affect the price
level.
"The banker, therefore, is not so much primarily a
middleman in the commodity 'purchasing power' as a
producer of this commodity. However, since all reserve
funds and savings today usually flow to him, and the
total demand for free purchasing power, whether
existing or to be created, concentrates on him, he has
either replaced private capitalists or become their
agent; he has himself become the capitalist par
excellence. He stands between those who wish to form
new combinations [the entrepreneurs] and the
possessors of productive means. He is essentially a
phenomenon of development, though only when no central
authority directs the social process. He makes
possible the carrying out of new combinations,
authorizes people, in the name of society as it were,
to form them. He is the ephor [Webster's 1913: A
magistrate; one of a body of five magistrates in
Sparta...They exercised control even over the king.]
of the exchange economy...."
Chap. II, The Theory of Economic Development
---OVER---
[Chris Cook] "Retail price inflation on the other
hand is a 'fiscal' phenomenon related to Government
credit creation which is not backed by productive
assets in government hands or by the tax base."
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Perhaps you will explain what you mean by government
credit creation. Perhaps you are misinformed.
Government in the West (in contrast for example to the
government of Zimbabwe) does not directly spend its
own creditary instruments, but exchanges them, in the
same manner as everyone else, for fungible bank
credit, which it spends. Or, it spends from bank
balances that are the residuum of tax collections. Or
some combination thereof.
---OVER---
--- cjenscook <cojock@hotmail.com> wrote:
"What most on this list agree on (except folks like
William B. Ryan) is that the main problem stems from
interest rates. Well that's part of it, at least."
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[Chris Cook in reply] As I attempted to explain (I was
a bit pissed at the time, and euphoric in that at last
the Cyber-Gods of YahooGroups permitted an audience)
any Interest charged in excess of the costs of
administration and shared defaults is, I believe,
inflationary, in that it is not based upon any Capital
(=Value).
William is right in that loans=deposits, but he seems
to ignore Banks' Capital, or rather the lack of it.
Banks "monetise" OUR credit by issuing IOU's which are
then used as Money. These are not ENTIRELY Valueless -
since they are based in part upon Banks' Capital bases
(hence Basel I and II Capital Requirements) but they
are for the most part Valueless, backed only by
government fiat/acceptance for payment of taxes.
Another way of looking at it is that we issue an IOU
(a claim over our future capability to provide Value
in exchange) and Banks reflect that back like a mirror
by issuing an IOU against it. This is a "claim upon a
claim" - a "double negative" giving what many would
regard as a "false positive".
The alternative I see emerging to the current Bank
clearing system is the "Guarantee Society" or
"Clearing Union" - which monetises OUR bilateral
"trade" credit through the provision of a mutual
guarantee backed by a provision paid into a default
fund.
With a Bank or similar as Manager, perhaps.
So much for Credit or "Deficit-based" money, which is
based upon the productive individual and "time to
pay".
Let's look at "asset-based" (or "Debt-free") Money
now.
The vast bulk of Money is currently "Deficit-based",
but "Property- backed". It is this deficit-based
Money that is directly responsible for asset price
inflation resulting in a transfer of Value from the
rest of Society to those capable of borrowing to
acquire assets.
NB. Retail price inflation on the other hand is a
"fiscal" phenomenon related to Government credit
creation which is not backed by productive assets in
government hands or by the tax base.
The principal means for "investment" or "asset-based
finance" based upon "ownership" of assets, has been
the Joint Stock Company -a deeply defective legal
form.
I am pointing out that there are at least two other
mechanisms for investing in productive assets:
(a) Units in Unit Trusts - growing massively in Canada
- but again defective as an enterprise model;
(b) "Equity Shares" (ie proportional shares) in an
"Open Corporate" such as the UK LLP,(or the US LLC as
a close cousin).
If we utilise the latter to invest in productive
assets such as property or renewable energy
production, then the outcome is a stream of property
rentals and energy which has "Value in exchange".
So instead of receiving interest on our deposits in a
building society we could receive instead proportional
shares in the rental revenues from a pool of
properties or energy from (say) a wind-farm.
NB If we sell -suing the Capital Partnership - perhaps
30% of the production of the average windfarm to
investors at today's price, then this asset is funded
by the interest-free loan that results (directly
analogous to deli-dollars). Virtually ALL renewables
are "self funding" in this way (since their fuel is
free) and essentially this creates a new form of
"energy money".
Quite revolutionary.
Such investment is at the heart of Islamic Finance
-its just that they lacked the legal tools to put it
into effect. I believe that the model is in fact
"optimal" (as Wes Burt has been saying for years)
since those who do not use it will be a at a
disadvantage to those who do.
The outcome of such investment (which couldwell start
to happen in the UK through the use of the Property
Partnership for "Equity Release - where it wipes the
floorwith existing inequitable forms) will be the
gradual growth of what I call a "National Equity".
All good stuff.
-
"Do you mean the problem stems from positive interest
rates, interest in general, or the current level of
interest rates?"
---------------------------------------------------------------------
[Chris Cook in reply] It's the level: any level over
the cost of admin and defaults is inflationary, I
believe.
-
"CCs, and especially mutual credit systems increase
the money supply without any growth in overall debt."
---------------------------------------------------------------------
[Chris Cook in reply] Not strictly true: overall debt
increases: the National (State) Debt doesn't.
-
"The biggest problem for the populace, but benefit for
the elite rests with Fractional Reserve being the
mechanism to increase the money supply. The increased
money is created by someone needing to borrow, but the
benefit goes to the lender.
However, lending out money makes no sense if you will
not make a profit or have some gain from it (the cost
of money to users comes from interest rates). Is it
possible to envision lending as a service of the state
rather than a for-profit enterprise?"
---------------------------------------------------------------------
[Chris Cook in reply] It's just that we have lacked
the tools for "investment" in most assets. Interest as
a return on a secured loan has become conflated with
interest on an unsecured loan.
I would replace secured loans with "Capital
Partnership" investment and unsecured loans by mutual
credit from a Guarantee Society free of interest, but
not necessarily free of cost.
There's nothing wrong with a Return on Capital,
provided the risks are shared equitably (which they
are not in a Joint Stock Company).
The new partnership-based tools I describe in my site
http://www.opencapital.net are already beginning to
change the system: I merely observe them and am
attempting to explain, document and develop them.
Best Regards
Chris Cook
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