Quote of the Day

"Money is like muck, not good except it be spread."

(Sir Francis Bacon making the original justification of Fractional Reserve Banking in his essay "Of Seditions and Troubles.")

Comments

Jim said…
its great to spread money, but to spread money then you need to have money to spread.

In old days, gold was stored in bank vaults to keep it safe. the bank issued a receipt, and people soon started trading receipts rather than withdrawing gold using it to pay a person, then that person depositing gold back to the bank for a new receipt. the bank charged a fee for storage, though they did often lend out your gold to somone else. To do this they opened high interest account whereby you would need to give a lot of notice before you withdraw your funds. as a reward part of the interest the bank charges on the loan is passed to you. the thing is the bank can not create a receipt for gold that does not exist, that is fraud.

So money can be spread and the system is stable. but if receipts for gold are made when there was never the gold deposited then you have a real problem, the bank is lending nothing, and if everyone withdraws their gold you soon see there are more receipts than there are reserves in the vault, thus lots of people are going to lose.

Interest rates are set by the market, if there are a lot of savers then interest rates fall, making it less attractive to save and more attractive to borrow, when the number of borrowers raises in proportion to the number of savers, then interest rates raise, to encourage more savers and to discourage borrowing.

Of course if you are lending receipts and no one actually knows what the recipt is for, its hardly going to end well is it.

Jim said…
here is what Keynes himself said on the system, and why its a great idea.

"By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

- John Maynard Keynes
Jim said…
The largest problem though comes from the debt that is left by people lending nothing.

It really is a huge problem, and its not a problem that will go away. Pervious governments have kicked the can down the road, and the current government continues to do so. the current government by the time of the next election will have added £700 billion to the national debt in 5 years (that is almost double the amount blair and brown added in 11 years) its also more than the pevious 100 governments before them combined added.

In un funded liability (government promises, like old age and public sector pensions) the debt is over £11 trillion. we can never pay this back, thus once the interest rates raise and they will do, then we are up the creek.

Is it too late? - probably is now to save the nation, no government of any country in all of history has ever managed to over come debt on that scale (12 times our entire economy) perhaps there was a chance in 2010, if cuts were made and the budget balanced from day one, but it never happend. talk of cutting the deficit by 1/3 cut no ice (especially as its been cut by adding to liability, rather than cutting spending) under the current government spending has increased, the amount of debt has increased and of course the interest payments on the debt have increased.

we really are in trouble, and you need to get your wealth were governments can not get their grubby mitts on it, because they will try. its all they can do. The pound will crash, much like the US dollar will too, probably the Euro as well.

Liblabcon - well none of them were willing to solve this problem when there was time to do so, and though we can opt for the best of a bad bunch they still went in the wrong direction (even if it was at a slightly lower speed)
Chris Whiteside said…
Jim, you have obviously put a lot of thought into those comments.

Can we put the Keynes quote into context, please? It appeared in a 1920 essay called "The economic consequences of the peace" which was a scathing attack both on how governments on both sides had funded the First World War, and on the likely consequences of the penal economic terms of the treaty of Versailles.

There are another six words at the start of the sentence you quote which make clear that what he was attacking was not the system so much as inflationary finance. The full quote begins

"By a continuing process of inflation, governments can confiscate, secretly and unobserved ..."

I agree that the British government is still borrowing far too much. However, the deficit has dropped by a third and will come down further as the economy begins to recover.

You're right to sound a note of caution as we are certainly not out of the woods yet and the possibility of a complete economic collapse such as you predict is there - if Ed Miliband is Prime Minister and Ed Balls chancellor after the next election it will become all too probable that Britain will suffer a financial meltdown - but I don't think we are on that track at the moment.
Jim said…
I class fractional reserve banking as inflation.
If i have £10 and I loan out £100 then in effect i have magically put £90 into the supply of currency.

Inflation - An increase in the currency supply relative to the goods and services available.


I know many people think of inflation as raising prices, but that is not really the case, really raising prices are just a symptom, of inflation (an increase in the currency supply)
Jim said…
though on an even more serious matter this morning, I hope the news are jumping to a rash conclusion on the latest happenings in Syria. Hoping it turns out to be a less sinister disaster (a gas leak or something)

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