Amadan_Eile
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“As it happens, we published an article at the time on what the German Central Bank said:”
….hadn’t seen that thanks. Will have a read and a think.
I am not sure that it is wise to move on to the question of whether “bank lending could cause the currency to depreciate” at this stage given there is no agreement on whether banks can create purchasing power. That is a necessary part of the argument to understand and agree to get to the conclusion.
What I am struggling with in the disagreement about whether commercial banks granting credit creates purchasing power, is that I feel my comrades from critisticuffs have given possible examples where financial instruments have created purchasing power that was not backed by base money. I don’t see that those examples have been shown to be wrong.
I also think the easiest example to set up is just one with bills of exchange:
1. Archibald wants £10 worth of chicken feed. He doesn’t have £10 but writes Belinda a promise to pay her £10 in a week and gets the chicken feed in return.
2. Belinda, wanting to eat an omelette, visits Cuthbert’s cafe. Belinda, persuades Cuthbert to accept Archibald’s promise to pay which she signs over to Cuthbert.
3. Cuthbert, needing eggs, which Archibald supplies, was actually happy to accept Belinda “paying” in this way, because he then presents Archibald with his own promise to pay (causing it to disappear) in return for more eggs.
In this example, none of A,B or C need actually have ever had the £10. Yet the promise to pay was able to effect the transactions i.e create purchasing power (obviously a single £10 note could have achieved the same had Archibald not been skint but it turns out it wasn’t needed).
For the moment, maybe the best thing to do in an attempt to move the debate forward would be if someone who has this view could explain why in the A, B, C example above, the promise to pay is not itself what creates the purchasing power? It seems to me that it is functioning absolutely as money in the sense that it was what facilitated the transactions as means of purchase and means of circulation.
Once we introduce banks, with 1000s of depositors and 1000s of loans extended, what in the above example is a rather contrived circle where no cash was needed becomes a routine phenomena. They are able to create book money which they successfully calculate will never be required to be backed by base money routinely. Therefore they are not mere clearing houses for unused money but turn their role in taking hold of unused money into the opportunity to create further purchasing power not matched by the money deposited with them, by granting credit which they calculate will not be called for in cash. But we don’t need to go there as it seems to me the disagreement should be capable of resolution at the level just of working out the bill of exchange point.
On a final (separate) note: the German Central Bank explains that this is how it works (I know in the SPGB text the critisticuffs piece disagrees with the Bank of England piece to the same effect is referred to)- the German Central Bank one is worth a read and is here in English: https://www.bundesbank.de/resource/blob/667334/de28e82ef38090619f3af34e1442d269/mL/2017-04-monatsbericht-data.pdf Obviously, although I agree, I don’t do so because they are Central Bankers. They do a reasonable argument and explanation of how they see it working.
