monetaire hervorming (5) FAQ

[Antid Oto]

REPLY TO: D66 at nic.surfnet.nl

Hieronder in mijn rant tegen fractional reserve banking een aantal
kritische vragen aan Prof. Huber over zijn seigniorage hervormings
voorstel. Complexe materie, maar zeker het bestuderen waard.

Voor de volledige FAQ zie:
http://internal.vivant.org:8080//Social%20currency/FAQ_Professor_Huber_v010206.doc
http://www.socialcurrency.be/

>>>
Reform der Geldschöpfung
Wiederherstellung des staatlichen Geldregals und der Seigniorage durch
Vollgeld

Joseph Huber
Der Hallesche Graureiher 2004-5

- (F)AQ to Professor Huber  (Vivant “Social credit” study 12 2005)


Q: You claim that banks realize an extra profit by avoiding the costs of
borrowing through creation of sight deposits.

A: Well, I would no longer put that in the forefront. Since all banks
have to pay now some deposit interest even on overnight deposits, their
extra profit from the creation of sight deposits has actually shrunk to
probably quite little or even nothing at all. That which persists,
however, is the amount of seigniorage foregone to the public purse - an
important amount of about 3% of GDP or € 160–180 billions in the euro
area, roughly equivalent to the increase of M1 minus the external
current-account surplus, in case there is one.

Q: Why do banks still pay interests to people with saving accounts?
Isn’t it much more profitable just to create sight deposits without
paying interests to people who save their money?

A: Very good point. Most readers do not see what you obviously have
clearly identified. In my opinion, there are several reasons why banks
have continued to pay interest on deposits, the three or four most
important being:
1. Competition among the banks for customers.
2. Banking laws and regulation on the basis of banking traditions.
3. Most bankers do not clearly understand how the fractional reserve
system actually works. They keep the banking practices they have always
kept, even though the realities of money and money creation have changed
fundamentally.

Q: In your proposal banks will have to transfer the money between the
borrowers and the lenders.
However what will this mean for people who put their money on the bank?
Won’t they have access anymore to the full amount of their money for a
while?
If they don’t have access to their full amount of money, they will
demand a relative hight intrest rate.
This high intrest rate will diminish investment in the society with a
negative impact on economic growth.
If they still have immediate access to their saving deposit, what will
has changed then in practice?

A:  I agree that within a regime of plain money banks would have to make
sure not to run short of money and thus would no longer allow to
withdraw money from deposit accounts before maturity or agreed notice.
Customers would continue to have immediate access to their overnight
deposits (on their money account, today's sight deposits). Overnight
deposits would certainly go without interest again. As it has always
been the case. The practices of paying interest on overnight deposits
and of allowing to withdraw money from time deposits at any time are
quite new, they have been introduced on a general basis only in the
1990s (except certain single countries such as Switzerland).

Q: If they don’t have access to their full amount of money, they will
demand a relative hight intrest rate.
This high intrest rate will diminish investment in the society with a
negative impact on economic growth.
If they still have immediate access to their saving deposit, what will
has changed then in practice?

A: I do not think that customers were in a position to demand higher
deposit interest. It would per se neither be a seller's nor a buyer's
market. So interest rates would stay unaffected - provided the central
bank has made sure that there is an appropriate quantity of money in
circulation.

Q: You seem to say that it is technically impossible for banks to  grant
a loan based on non-cash deposits like saving deposits, and that the
banks actually do not need the saving deposits.
Does this mean that the saving deposits are not at all used by the banks ?
Is there a difference between ‘credit banks’ and ‘saving banks’ in this
regards ?

A: Again you are tackling one of the crucial points: In the present
fractional reserve system banks do /technically /not need deposits for
granting loans.
It is technically impossible to transfer credits in a customer account
to a bank's account with the central bank. If it were possible, it would
be equal to counterfeiting central-bank money. Banks can create credit
in the current accounts of their customers.
All it needs is a simple entry into the books: bank loans-account to
customer current-account.
Banks, however, cannot create credit for themselves, i.e. they cannot
make entries into their account with the central bank.
Just as they are no longer allowed to create banknotes of their own.
Nevertheless, banks are still obliged, /by law and traditional
regulative practices,/ to take up deposits to a certain degree and pay
some interest on them. The specific banking laws tend to differ somewhat
according to country.
But it's always about 'golden banking rules', i.e. loans should not
exceed a certain percentage of capital and/or deposits, and long-term
loans should keep within certain proportions to long-term deposits, as
short-term loans to short-term deposits.
In my understanding, these rules are historical relics from the times of
metal money and gold and silver standards. They don't reflect yet the
nature of modern money which is purely informational and created 'ex
nihilo', or say, ex scientia. Most of a bank's customer deposits are not
accompanied by an inflow of central-bank money to the bank, but
represent bank-created credits.
Removing them from a current account to a savings or time-deposit
account just means do redeclare these deposits from 'overnight' into
'short or long term'.
That has a certain, albeit little, influence on the transaction reserves
a bank needs to plan for.

And this, the need to provide transaction reserves, is actually the
rational and practical core to these historical practices: For being
able to carry out current transactions, banks need a certain amount of
central-bank reserves (6–15% of turnover) in their cash register and
non-cash on the banks' accounts with the central bank. Some of that
money comes through customers who receive payments from other banks and
abroad; but this does certainly not amount to very much, because such
inflows are normally equalled by comparable outflows, and because much
of the 'payment' is done by in-bank and inter-bank account-clearing.
With regard to this, there is no difference between different types of
banks.

Q: In your system, all new money would be created by the Central Bank.
At least part of this money would be appointed to the government (via
the treasury) , which can use it for expenses and so bring it into
circulation, after which it will appear on  as sight- and saving
deposits in the customers' accounts with the banks. When a bank then
wants to grant a loan, where does it find the money ? Does the bank have
to use the deposits of its clients ? Or does the bank have to lend the
money from the Central Bank ? Or both?

A: Banks would have to take up the money before being able to pay out a
loan. They would prefer to take up the money from their customers
because this is cheapest (deposit interest = lowest interest). Next they
would address other banks (interbank money market), and finally,
perhaps, the central bank. But if long-term money supply by the central
bank is optimally measured, there ought to be no need for additional
central-bank loans to banks. There are enough customer deposits. But
banks could not make use of that money just like this - because the
customers' accounts would no longer be part of a bank's summary current
account.
Customer accounts would exist in their own right as plain money
accounts, exclusively owned by the customer and thus no longer as part
of a bank's balance sheet. The banks would simply be the account
managers of their customers. Some could specialise in this service, and
do the job probably at lower costs than today.

When a bank would take up money from a customer, the money would have to
be transferred from the customer 's current account (then money account)
to the bank's account with the central bank. In the same way, if the
bank pays out a loan to a customer, it could no longer simply be
'credited' by the bank into the customer's current account, but would
have to be transferred from the bank's central-bank account to the
customer's money account.

Q:  If the bank uses money from the client in your system, which type of
deposits are used ? The sight deposits or the saving deposits ?

A: It would be the same as today: for carrying out regular paymentst it
is always the sight deposits from a current account which are used.
Savings deposits have to be transformed into sight deposits before they
can be transferred to other accounts, in your case transferred to the
bank (not just redeclared inside a bank’s clearing procedures). The
customer in turn 'receives' a credit note in a savings or time-deposit
account which then clearly is not a money account but a capital account
or pure liability account. There is no money in a
savings deposit, you cannot pay with it - at least not regularly,
because we do normally not pay by capital transfer.

Q:  Because in your system, the sight deposits will be plain money,  we
actually have a 100 % reserve system, and the money is considered as the
sole property of the client. Can the bank , in  such conditions, still
use the money of the sight deposits for loans ? If the bank would still
grant loans based on money from sight deposits, and if this would imply
the transfer of real money, than the amount of money on the sight
deposits from which the money is taken, should decrease or be replaced
by some credit note which cannot be used as such for payment. Is such a
  system considered, or do we completely misunderstand this aspect.

A: Yes, see above.

Q:  If the bank cannot use the sight deposits any more for loans, it
seems logical that they will stop paying interest on it. Is this correct ?
Furthermore, if the banks also cannot use the money from the saving
deposits for loans, as you say, there is also no reason to give interest
on these saving deposits. Is this correct ?

A: I think, you are right with regard to sight deposits, not however as
far as savings and time deposits are concerned. In a plain money regime,
savings would actually be what they seem to be today without being it: a
money deposit with the bank (not a bank-created credit). And when a bank
wants to take up such deposits, in order to make use of them for own
purposes, it will certainly have to pay deposit-interest on them.

As to current accounts (sight deposits) the situation is different.
Banks could not make use of that money and thus would have no reason to
pay interest on it, just  as we do not expect to receive interest
payments on the banknotes we carry around in our wallet.

Today, of course, there are those historical relic practices. Bankers
don't think about it. Financial scientists either. Once they would start
to look at realities with different eyes, they would certainly want to
stop crediting interest payments into customer accounts. What is against
them, however, and furthermore, is market competition. They have to
attract all sorts of customers alike because they cannot make a neat
separation between their customers as
depositors and borrowers. Simply think of overdrafts. Strengthened
market competition among banks, together with tightened regulation, have
been the main reasons for introducing in the 1990s (small)
deposit-interest payments for sight deposits by banks in countries where
this wasn't done before (e.g. the US and Germany).

Another phenomenon in the same direction was the introduction of 'time
deposits' that are available to the customer any time. But that’s a
clear case of mislabelling. Bankers and followers of banking theories
like doing this, i.e. blurring boundaries between money (means of
payment), money surrogates and capital; followers of the currency school
tradition clearly don't.
The seigniorage reform which James Robertson and I have conceived of is
in the currency tradition. From that point of view, the creation and
control of money is a question of constitutional importance. As Irving
Fisher put it already in the 1930s:
nationalisation of banking, no; nationalisation of money, yes.

Q: For the moment we (Vivant www.vivant.org ) are mentioning the money
issue in our program only with a similar point of view as Stephen Zarlenga:
 /The money system should be organized as a fourth branch of government
on a par with the executive, judicial and legislative branches. /
 http://www.ccmj.org/fsc/040506-zarlenga.htm and a general remark that
loans to government should be at a very low rate of interest.

A: The money should be entrusted to an independent public body, a
monetary authority - the sort of central banks we have today e.g. in the
form of the European Central Bank or the Bank of England. They indeed
represent a 'fourth power'.
In German we can say /Monetative /complementing Legislative (legislative
power), Exekutive (government and public administration) and Judikative
(jurisdiction). With regard to this we are clearly on a same track with
Zarlenga. His monetary reform ideas, however, are simply replicating the
Chicago plan of 100% banking from the 1930s. The plan had its merits,
but also its flaws, and simply isn't
up to date any more.

Q:  If the banks have to pay interest to the Central Bank for money they
want to use for a loan, and if – on the other hand – the banks stop
paying interest on the sight deposits, then your system comes down to a
loss of interest for the owners of the sight deposits, in favour of the
Central Bank . Is this correct ?

A: No. In a plain money regime, banks would really have to do what they
pretend to do today without actually doing it: first take up money from
customers, other banks and the perhaps the central bank at lower
interest rates and then lend it to borrowers at higher interest rates.
Today, banks could indeed want to stop paying deposit interest on
deposits that do not come along with central bank reserves.
But in a plain money regime, banks could no longer create sight deposits
on a 10% fractional reserve. They would fully (100% indeed) have to
possess the money they are going to lend, and they would fully have to
pay it out to the borrower.

Q:  If the banks can loan money from the Central Bank, than new money is
put into circulation in two ways: via these loans to  the banks, and via
the direct transfer to the treasury (is this correct?). What will be the
order of priority here ? Will the Central Bank first decide how much the
treasury should have, and then fix the interest rate for loans to the
bank at a certain level to steer the amount of money that goes to the
banks ? Or  will it be the other way around (give priority to loans for
the banks at a low interest rate, and fix the amount of remaining  new
money for the treasury accordingly ) ?

A: First would come the treasury, i.e. the seigniorage into the public
purse.
Loans of the issue department of the central bank to the business
department of the same central bank should, and could be, minimized to a
few means for short-term fine-tuning by way of open market intervention.
The long-term money supply, however, should be spent into circulation by
public expenditure.

As to the questions of 'how much' and 'at what level of interest rates',
the central banks would proceed much in the same way as they do today.
One can expect, however, that monetary policy would return to its
original task of determining and controlling the optimum quantity of
money, whereas interest-rate policy would move into the background
again. In my opinion, interest-rate policy is a compensatory side-show
today because central banks have lost control over the quantity of
money. But central banks cannot really control interest rates and the
levels thereof; except of course their own interest rates (base rate,
lombard rate). Even this they cannot do autonomously because
central-bank rates are just another, though important component in the
collectivce interest-rates business cycle.

Q:  If loans to the bank are priority, ...

A: Central-bank loans to banks are not a priority. See above.

Q:. ... than in periods of fast economic growth (many loans), there will
be little money left for the treasury, if a certain inflation limit is
to be respected. Is this correct ?

A: No, on the contrary. Accelerating growth, if desired, would be
promted by the central bank by creating more additional money and thus
augmenting in this moment the seigniorage to the treasury, may be, like
today, on a fortnight basis. If they concluded, however, that cyclical
growth is 'overheating', they would stop creating additional money. Then
capital-market interest rates immediately go up and bring that boom to
an earlier, smoother end. Phases of money-supply 'overshooting' by the
banks, who behave pro-cyclically, could thus effectively be curbed to a
certain degree. I say, could... But this does not necessarily have to be
the case. It's up to the MFIs in the system and the specific policies
they pursue.

Q:  How is the seignorage calculated in your system? If the banks have
to make a loan from the central bank in order to have a 100 % reserve
for the loans they grant, are they then paying a supplementary
“seignorage”? They pay at least interest for it (or not?) How and when
do they pay the seignorage?

A: The amount of additional money necessitated by the economy would be
'calculated' in the same way as today. The central banks closely monitor
demand for money and capital, interest rates, prices, growth, growth
potential etc. and accordingly decide to create more or less new money,
or to absorb money at a given time.

Q:  What we are searching for is a list of disadvantages of the current
money system and the advantages of your proposal. With as much
references as possible.

A: A systematic discussion of disadvantages of the present fractional
reserve system as well as expected or supposed advantages and
disadvantages of a plain money regime brought about by seigniorage
reform can be found in the 90-pages book jointly written by James
Robertson and myself: Creating New Money. A monetary reform for the
information age, publ. by the New Economics Foundation, London, 2000. I
would like to recommend to you James' homepage:
http://www.jamesrobertson.com/
I have also written a more voluminous, academic book on the subject in
German language under the title of 'Vollgeld' in 1997/98.
For the rest I just can offer you the articles in English and German
language you can find on my homepage.

--
Prof Dr Joseph Huber
Chair of Economic and Environmental Sociology
Martin-Luther-University
D – 06099  Halle an der Saale
Tel  +49 – (0)345 – 552 42 42
Fax  +49 – (0)345 – 552 71 49
joseph.huber at soziologie.uni-halle.de
www.soziologie.uni-halle.de/huber

**********
Dit bericht is verzonden via de informele D66 discussielijst (D66 at nic.surfnet.nl).
Aanmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SUBSCRIBE D66 uwvoornaam uwachternaam
Afmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SIGNOFF D66
Het on-line archief is te vinden op: http://listserv.surfnet.nl/archives/d66.html
**********