Freitag, 8. Mai 2015

Why deposits never are money

The basic root of all these misunderstandings is not to distinguish between the two levels of a monetary system.

Level 1: the central bank (CB) owns the unlimited right to issue bank notes to settle any debt. This means, that a note is an item, which is handed over, when the CB is paying down a debt against a commercial bank. The reason for this handover is a claim of a bank regardless if this claim is due to a credit arrangement with the CB or due to a purchase of assets by the CB. This CB-deposit is a unconditional access to notes which are "legal tender for all debts...". So if the CB issues notes then the CB has less debts than before because it has settled a claim. What is it what the CB hands out when issuing a 100 € note? It is a piece of information that the owner of this information is able to settle debts up to an amount of 100 €, so he can get rid of his debt.

Is the CB indebted with this 100 € note? This can´t be, because of the two sided nature of every contract: a contract consists at first of a mutual obligation, that is a two sided debt relation. How to get rid of an obligation? Well you have to hand out the object which was contracted. In case of a credit obligation there is the time difference that the lender has to hand out the contracted object first, then the lender has to fulfill its obligation to give back the contracted amount. The crucial principle to understand is the difference between the obligation level of a contract and the level, where the obligations must be fulfilled. This is even hard to understand for scholars of law, because at first sight it seems ridiculous and superfluous to think like this. The idea of barter exchanges doesn´t make this difference so that there is only a handover of items, ignoring, that the property transfer has to be rooted in an obligation to transfer the item and the property of the item to the buyer. The same applies to the seller who gets the property of the note and the note itself as a payment, resulting in that none of the parties are obliged any more.

To sum up, even in monetary contracts it is necessary to have a media, whose transfer is able to fulfill a contract without leaving any obligation behind. This media is an information from the CB, that the owner of this information is able to settle the denoted amount of debts. The consequence is that you cannot transfer this information (usually called purchasing power) without the existence of debts, not even a present will do the trick because even to hand over a present requires a legal operation which constitutes a debt to the donators side. (Seems to be strange but is important!)

Level 2: the commercial bank is economizing the 'information pool' the CB had issued through credit contracts, which promise the borrower to dispone over the contracted amount. Contrary to the CB this promise is conditioned to the liquidity status of the bank - which is usually good but there are some risks, which materialize from time to time. For that reason banks have to settle the clearing differences with the CB 'informations'. One has to note, that the process of clearing does NOT mean, that the involved set of payments was not paid - of couse they are paid - all of them. The insistence of the banks to a settlement of the clearing difference means finally, that a buyer, who is paying through a bank money transfer is substituting a direct handover of notes in favor of using the service of a financial institution, which is transferring the 'information' (the base money) to the bank of the seller. That means, that every purchase is accompanied by a transfer of base money, the only difference is, that now the banks are doing the business to transfer the base money. Here lies the main reason for the belief, that you can pay with deposits, because hardly anybody is aware of all these operations, which are necessary to transfer base money from bank to bank. The invisibility of these operations for the public is the main root for the misbelief, that it is possible to pay with deposits.

So what is a deposit: now it is easy to see that a deposit constitutes a right for the owner to prompt the bank to make a (base) money transfer to a receiver, which is assigned by the deposit owner, who is obliged to transfer base money to the obligee (creditor). In a nutshell: a deposit is a right to dispose over money - conditional to the (base money) liquidity of the bank. (That´s why bank runs are possible.)

Finally it must be recognized that to identify base money and deposits is rooted in the ignorance of the hierarchical nature of the financial system. Only what the CB is issuing can be counted as money or HPM because only this HPM has the power to extinguish debts. Banks are economizing HPM because due to the banks interweavement they do not need 100% of the HPM they have to transfer. So HPM must be seen as a media to settle the clearing differences. This latter liquidity problem already is enough work for any bank department, which is responsible for a continuous positive liquidity level that is to have always enough HPM. These people know exactly, that there are no 'payments with deposits'! It´s simply not possible...


  1. I see the point you make.
    But how did people settle their debt let's say 150 years ago with no central bank (= no hpm)?
    How does paying with Bitcoin or any other #fintech "currency" fit in your theory? Do we end up in a barter system if we start using those?
    My point is, the system is designed bottom-up. Central-bank issued hpm is useful to document flows of the tier1 (user) level. I don't see (yet) it's the only way to pay down debt.

  2. 1. Thats easy, because they settle debts by handing over the item which was contracted. It doesn´t matter if there is no HPM, what is essential is, that there is a contracted object!

    2. Thats easy, because any transfer of BTC must have a reason and the reason is a contract, which results in a BTC-debt. If you have a BTC-debt you must hand over BTC.

    Note: to own a BTC means to own a information which can be used to settle a BTC-debt. This is the same as a 100 bank note, which is also only a carrier of information (printed HPM-information from the central bank), that the owner of this information is able to settle a debt of 100. A deposit is only a right to make a disposition over HPM-information, which the bank as a payment agent must fulfill. Even within a bank the ownership of these rights must be moved, which means, that the right (claim) to dispose over HPM has changed the owner.

    The bottom-up approach only works within groups where everybody is known to everybody. Large societies are characterized by anonymity which leaves the bottom-up approach (also the neoclassical economic theory) essentially unworkable.


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