Table of Contents

Talk: Understanding the Money System

presenter: Mike Black

Mike Black delivered a presentation that does a very good job of explaining the fundamental underpinnings of our banking system. The videos embedded below are a recording of Mike giving the same talk at the Annual Bromsgrove Conference (a conference for monetary reformers).

Key points from the talk

• Mike's background
• studied mathematics at Oxford University
• worked at British Steel where he conducted operational research
• Having become interested in the monetary system, Mike, and an engineer friend of his, directed their combined analytical skills at making sense of the banking system's slight of hand.
• As mentioned above, Mike's talk was prepared for the Bromsgrove 2011 conference
• This event was organised by The James Gibb Trust, an educational charity working to reduce indebtedness
• The Trust sponsored Mike's talk
• Mike also introduced us to a quarterly publication called Prosperity which is associated with the conference
• He kindly brought some free copies along for us to take away and peruse.  
• The talk aims to address a long-standing area of confusion:
• whether money is cancelled out of existence when a loan is repaid. 
• Mike stressed that the mechanism by which money is created and destroyed is "like a conjuring trick"...
• a series of seemingly simple steps that can leave you scratching your head when you realise that wealth appears to materialise out of thin air and disappear again just as quickly.
• Key insights on what money is or, rather, isn't...
• the term "money" is rather imprecise as there are actually several types of money-like things, and these have very different properties
• Coins
• used to have intrinsic value owing to the use of precious metals
• now they only have value because we collectively trust that their effective value is reasonably stable 
• Banknotes
• started out as IOUs from goldsmiths/banks to customers whose deposits they held, but have since evolved to become currency in their own right - much like coins
• Current Accounts
• you might think of money as being "in your account"
• as we all know, this isn't the case
• if you "have £100 in your account", you have effectively made a £100 unsecured loan to the bank
• your £100 of bank account money is actually a £100 IOU from the bank to you
• unlike coins and banknotes, bank account money cannot be freely exchanged
• for instance, you can't pay someone by giving them your bank statement!
• the IOU agreement is between the bank and you alone 
• Banks' Reserve Balances
• this is a mysterious type of money that regular people will never come into contact with
• it is all held by the Bank of England (BoE) in accounts that belong to the banks
• at the end of each day, money is shifted between these accounts to adjust for inter-bank current account transfers
• e.g. if the net transfer of Natwest customers' money to Santander customers' current accounts is £1m
• then £1m pounds of reserve money will be moved from Natwest's BoE account to that of Santander
• This is necessary because Santander now has £1m of extra liabilities (IOUs to customers)
• see the second video for more on this...
• Mike went onto show how each type of money is affected in a simple series of transactions
• see the videos for the walk-through
• basically, there are three people and one of them gets a loan, pays one of the other people, and eventually pays of the loan 
• there is no change in BoE reserve money - and so the bankers can legitamitely claim that they don't create reserve-money
• however, the example also shows that they DO create current account money
• thus, Mike unambiguously demonstrated that the country's money supply is at the mercy of private banks - QED

Q&A and talking points

• in response to the description of current account money as "unsecured loans from depositors to banks", Sue asked "can we deposit our money in the form of secured loans"
• Mike thought not, although several people pointed out that the government does insure losses up to a limit
• this was recently raised to £85k (see http://www.guardian.co.uk/money/2010/dec/17/fscs-savings-safety-net-raised)
• Steve Bollom (sorry if name is wrong!) asked why banks aren't lending to consumers
• John Dixon explained that banks have to make loans to earn money (as interest)
• and that the more reckless ones (Northern Rock) actually borrowed vast sums of money themselves..
• so that they could lend it on again for a markup
• but they have to balance this risk with the chance that some of their borrowers might default
• Northern Rock lost this gamble in spectacular style
• But all banks are worried about defaults now because the world's economy is very unstable
• Consequently, they are reluctant to lend
• And, in fact, the government is asking them to simultaneously build their reserve ratio while lending more
• this doesn't make an awful lot of sense, and only serves to highlight how stupid and/or poorly understood the current system is 
• also, several people pointed out that when they do lend, only 8% goes into "productive" projects
• the rest goes into assets (like property - i.e. mortgages), meaning another asset bubble is practically guaranteed
• Dermot made a related, and very interesting point...
• a lot of criticism of the banks focuses on their reckless gambling... 
• but the real problem, as he sees it, is that these private institutions are effectively shaping the future direction of our nation
• their rush to fuel asset bubbles for personal gain...  (previous point)
• means that they aren't investing in things that would benefit society
• in other words, by granting them the power to create money and direct it into the economy as they see fit...
• we have effectively given them the reins of the country :-(
• A new member (sorry, didn't catch the name) asked how one would describe Quantitative Easing using the framework Mike introduced.
• Peter explained that QE only adds to the reserve money supply i.e. that held in the Banks' BoE accounts
• This has grown by nearly £400 billion
• While current account money, has been reduced by £100 billion
• So the banks assets/liabilities ratio looks better... (i.e. defaults are less likely to bankrupt them)
• but consumers and businesses have a shrinking money supply, which is probably why growth is as low as it is 

The videos

Other business

• Peter reported that he has looked into the price of a stall at  peace in the park:
• It's only £20 and so this looks doable
• Next meeting will be March 26th @ a new venue...