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Subject:Re: [socialcredit] Re: [chdouglas] Public-spirited Banking (was: Re: The Abolition of Interest on Loans)
Date:Tuesday, March 18, 2008  08:19:06 (-0700)
From:keith wilde <kwilde @...............org>
In reply to:Message 5287 (written by Peter Hogwood)

OK, thanks.  The usual implication when someone invokes the quantity theory is that an increase of money supply must necessarily increase general price levels. It's unusual to have the discussion start with the assumption of a fixed money supply and to then work on the other elements of the relationship. 

Peter Hogwood <p_t_hogwood@yahoo.com> wrote:

Keith, the way I understand it, the quantity theory is
that there is some measurable quantity of money, that
constitutes the totality of money, such as a mass of
gold or silver coins, or bank notes, and that the
importation or minting of say, additional gold or
silver coins, or printing additional banknotes will
affect the general price level without affecting the
real factors of production. That is to say, any mass
of money will support any volume of production and
consumption, in continuous circulation. Inflation
will distort accounting numbers but will have little
effect on real factors, although the ownership and
control of the real factors may well change from
person to person because of the distortion in the
numbers. Historically, the alternative theory was the
"real bills doctrine" which is more akin to the modern
creditary theory, although the real bills doctrine
contains errors in respect to modern theory. Today,
most transactions involve bank deposits created by the
banks, which do not perpetually "circulate" like
tangible or quasi-tangible coins or bank notes. But
rather, are issued as "tickets" by firms through
"investment" with accommodation by banks in the ticket
metaphor, which are redeemed and thereby effectively
canceled at the point of retail through sales to final
consumers. The flux of investment by firms and the
reflux through sales parallels the flux and reflux of
deposits from and to the banks through lending and
amortization, which accommodate the process through
financial services supplied to firms and consumers.

Incidentally, the many recent actions of the Federal
Reserve, as for example with Bear Stearns, indicate
that policy makers at the Fed, when push comes to
shove, do not believe in the quantity theory, though
they pay lip service to it during more "normal" times.
Practical lessons learned, I believe, from the Great
Depression.

I am informed that you are a professional economist.
I would appreciate your further comments.

Peter


--- keith wilde wrote:

> Hi Peter,
>
> You say below that
> "the theorem that loans create deposits which
> function as money...is contradictory to the quantity
> theory that there is inherently a scarcity or
> limited quantity of money."
>
> I find that a very strange statement of the
> quantity theory. Can you explain or cite an easily
> accessible exposition, please?
>
> Keith Wilde
>
> Peter Hogwood wrote:
> "Peter, You only left out two components--the time
> value of money and opportunity for other
> investments..."
> ---------------------------------------------------
>
> Then, I take it, you do agree with the three
> components that I listed.
>
> The time value of money theory is related to the
> quantity theory. The concept of opportunity cost to
> loans advanced is also related to the quantity
> theory.
>
> The more modern position is expressed by the theorem
> that loans create deposits which function as money,
> which is contradictory to the quantity theory that
> there is inherently a scarcity or limited quantity
> of
> money.
>
> In the more modern view interest is fully explained
> by
> the three components that I listed, which are
> payments
> for financial services rendered by banks to the more
> general economy.
>
> I would value your reply.
>
> Peter Hogwood
>
>
>
> --- Claudette Konola wrote:
>
> > Peter,
> > You only left out two components--the time value
> of
> > money and opportunity for
> > other investments...
> >
> >
> > On Mon, 17 Mar 2008 09:43:13 -0700 (PDT)
> > Peter Hogwood
> wrote:
> > > There is a significant false premise to your
> > argument,
> > > Ardeshir.
> > >
> > > "So what would be reasonable in your view, given
> > that
> > > it takes your people at most an hour to do the
> > > paperwork, and after that, there's nothing more
> > for
> > > you to do but collect my monthly payments?"
> > >
> > > The false premise here is that the
> administrative
> > > expense in granting loans is the only expense
> > incurred
> > > in granting loans. The components of interest
> are
> > 1)
> > > the insurance premium to cover loan defaults,
> > which is
> > > by far the largest component of interest
> received
> > by
> > > the banks; 2) the administrative expense,
> salaries
> > and
> > > wages paid by banks, etc. and other ordinary
> > business
> > > expenses; and the final and least component: 3)
> > the
> > > net profit from banking.
> > >
> > > The default or risk premium varies by borrower
> > risk
> > > category. In every risk category the borrowers
> > pay to
> > > compensate the banks for defaulted loans within
> > the
> > > risk category. Therefore, higher credit risk
> > > borrowers pay higher interest rates than lower
> > risk
> > > borrowers.
> > >
> > > Peter Hogwood
> > >
> > >
> > >
> > >> On Sun, 16 Mar 2008 13:58:25 -0400 Ardeshir
> Mehta
> > > wrote:
> > >>
> > >>> On 16-Mar-08, at 8:31 AM, Claudette Konola
> > wrote:
> > >>>
> > >>>> So, if nobody pays interest on loans, what is
> > > going to motivate those who have money to let
> > > somebody who needs money use it?
> > >>>
> > >>> WHY WOULD BANKS LEND MONEY TO ANYONE IF THEY
> > COULD
> > > NOT CHARGE INTEREST?
> > >>>
> > >>> Well, I am not against banks making a
> reasonable
> > > amount of money for taking the trouble to issue
> a
> > loan
> > > to us. Call it a "reasonable profit on a
> > transaction"
> > > , for example. If the bank that lends us $25,000
> > to
> > > buy a car were to say: "We are willing to lend
> you
> > > this money, but we would have to make a
> reasonable
> > > amount of profit out of the transaction" , I'd
> > say:
> > > "Okay, fine. So what would be reasonable in your
> > view,
> > > given that it takes your people at most an hour
> to
> > do
> > > the paperwork, and after that, there's nothing
> > more
> > > for you to do but collect my monthly payments? A
> > law
> > > firm might charge me, let's say, $500 per hour
> at
> > the
> > > outside: so, does $500 seem reasonable to you?"
> > >>>
> > >>> It sure does to me. Does it not to YOU?
> > >>>
> > >>> But does TEN TIMES as much sound reasonable to
> > you?
> > > WHICH law firm, no matter how prestigious, will
> > charge
> > > you five GRAND an hour? And yet banks get away
> > with
> > > this, and more, every day of the week!
> > >>>
> > >>> However, there's another way banks can make
> > money
> > > on loans: they can look upon it as an
> investment,
> > and
> > > share in the profits of that investment. If a
> bank
> > > issues a loan to a company, that company will,
> of
> > > course, use that money to expand its operations,
> > and
> > > thereby make profits. The banks can stipulate,
> in
> > the
> > > loan contract, that they will get a share of the
> > > profits.
> > >>>
> > >>> The same thing can apply to a mortgage. If you
> > buy
> > > a house today for $200,000, and in order to buy
> > it,
> > > borrow $100,000 from the bank, and if after a
> > year,
> > > because of market forces, the value of your
> house
> > > increases by, say, 3%, the bank can stipulate
> that
> > it
> > > will get a 3% increase on the next year's
> monthly
> > > payments. That seems fair enough, because it
> isn't
> > as
> > > if you did something yourself to cause the value
> > of
> > > the house to rise. It was just your good luck.
> > >>>
> > >>> Of course if that's the way the bank wants to
> > > structure the loan, then if the value of the
> house
>
=== message truncated ===




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